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5 Times to Invest With a Taxable Account

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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“Invest in your retirement.”

“Contribute enough to your 401(k) to get the full match.”

“Open an IRA.”

We’ve all heard these standard snippets of advice. However, while investing in your retirement is important, it’s not the only way to invest; a taxable account is another smart option.

Taxable accounts don’t have the same benefits as IRAs and 401(k)s, which enjoy tax-deferred growth. But they do offer flexibility and other perks. Below, find out how taxable accounts work and what their advantages are.

5 times a taxable account could be beneficial

An individual taxable account is an investment account offered by a brokerage. With a taxable account, you can invest in assets like stocks, bonds and mutual funds. As your fund grows in value based on the stock market’s performance, you’ll owe taxes each year on your investment income.

While retirement accounts like 401(k)s and IRAs have tax benefits, they often have limitations too. Taxable accounts offer greater flexibility and control over your money. Here are five situations where investing in an individual taxable account may make sense.

1. You plan to use the money before you retire

When you invest in a retirement account, accessing your money before retirement age can cost you. For example, if you have a 401(k) and make a withdrawal before age 59 and a half, the penalties can be costly. Not only will you owe federal and state income tax, but you’ll also pay a 10% early withdrawal penalty. That means if you need access to your money before you retire, you’ll lose a big chunk of it thanks to taxes and penalties.

With an individual taxable account, however, you’re not subject to the same rules. A taxable investment account can be cashed out at any time and for any reason without penalty. If you plan to save money for a major goal besides retirement, a taxable account may make more sense than a retirement account.

2. You want to use the money for various goals

There are many tax-advantaged investment accounts that can be used for a variety of purposes. However, how you use the money in those accounts typically is limited to the account’s specified intention. For example, 529 plans can be advantageous for college savings, but you can withdraw from a 529 plan only to pay for qualified education expenses — or face a 10% penalty on the withdrawals plus income taxes.

Unlike 529 plans and other tax-advantaged investment accounts, you can use a taxable account for anything. If you’re planning to buy a home, start a business, splurge on an epic vacation or simply invest money for a rainy day, you can use an individual taxable account as your savings vehicle and withdrawal money from it penalty-free.

3. You have a lot of money to invest

If you want to save aggressively for a particular goal, you may find tax-advantaged investment accounts restrictive. That’s because most have set contribution limits For example, for the 2021 tax year, you can contribute only up to $6,000 a year to a traditional or Roth IRA ($7,000 if you’re age 50 or older). That limit may not be enough if you want to aggressively save for your future goals.

While some taxable accounts may require a minimum starting contribution, they don’t limit how much you can invest. When you’re saving for a big purchase or expense, that freedom can be a huge advantage.

4. You earn too much for specialized investment accounts

Some tax-advantaged accounts have income limits. If you earn over the limit, you cannot contribute to that type of account. For example, if you want to open a Roth IRA, you can contribute the maximum amount as long as your income is under $124,000 if you’re single (or under $196,000 for couples who are married filing jointly). After that number, your contribution amount is phased out.

There are no income limits for individual taxable accounts, so you don’t have to worry about income restrictions and can invest your money as you wish.

5. You don’t want to worry about minimum distributions

With some retirement accounts, you’re required to take minimum distributions each year. Per IRS regulations, you have to withdraw money from a traditional 401(k) or IRA once you reach age 72. How much you have to withdraw depends on your age, year-end account balance and withdrawal factor.

For example, let’s say you had $500,000 in a traditional IRA and were 72 years old. You would have to withdraw roughly $18,870 this year to meet the required minimum distribution, even if you don’t need the money.

Individual taxable accounts don’t have required minimum distributions. You have complete control over when you start taking out money and how much you withdraw.

Opening a taxable investment account

If you’re looking for a way to invest that offers more flexibility and control than 401(k)s, IRAs or 529 plans, a taxable account may be best for you. It allows you to contribute as much as you want for whatever you want and to withdraw money on your own schedule.

If you decide that individual taxable accounts are right for you, you can open a brokerage account. For more information on how to get started, learn how brokerage accounts work.


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Understanding the Different Types of IRAs

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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Saving for retirement can be daunting enough — before you even get to choosing the kind of account that will house those savings. Individual retirement accounts (IRAs) alone have several iterations, each with its own specifications for different circumstances. Below, we cover the types of IRAs, their features and their limitations so you can make an informed decision about which IRA is right for you and your retirement.

What is an IRA?

The IRA was created by the Internal Revenue Service (IRS) to give individual investors another way to save for retirement. Rather than socking away your money in a savings account, you can contribute to an IRA, which allows you to take advantage of market gains, helping your money grow faster. There may even be some tax benefits to using an IRA.

There are several types of IRAs available:

  1. Traditional IRA
  2. Roth IRA
  3. SEP IRA
  5. Rollover IRA
  6. Spousal IRA
  7. Nondeductible IRA
  8. Inherited IRA
  9. Education IRA

6 popular IRA types

While there are many different types of IRAs, you probably won’t use all of them. In fact, you’ll most likely use just one or two of the most common types in your lifetime. Below are six of the most popular IRA types available.

1. Traditional IRA

  • Who it’s best for: Ideal for workers who don’t have access to an employer-sponsored retirement plan.
  • Contribution limits: In 2020 and 2021, you can contribute up to $6,000 per year (or $7,000 if you’re 50 or older). Limits apply to all your traditional IRAs and Roth IRAs.
  • Tax treatment: If you aren’t covered by a retirement plan at work, you can deduct the full amount of your contribution on your tax return.

A traditional IRA is one of the most common forms of IRAs. You can open and contribute to a traditional IRA until you reach the age of 70 and a half. You can open one as your sole retirement vehicle — as some self-employed people do — or as a supplement to a 401(k) plan. There’s no income limit, so you can contribute to a traditional IRA regardless of how much money you make.

According to Paul T. Joseph, an attorney and certified public accountant, a traditional IRA offers substantial benefits.

“The traditional IRA allows you to invest money into a tax-deferred account, which you can invest and allow to grow tax-sheltered until you withdraw the money or are compelled to withdraw the money at age 70 and a half,” said Joseph. “You receive a tax benefit upon the deposit into the account, and the account grows tax deferred until withdrawal.”

2. Roth IRA

  • Who it’s best for: Ideal for low- and middle-income workers.
  • Contribution limits: In 2020 and 2021, you can contribute up to $6,000 per year (or $7,000 if you’re 50 or older). Limits apply to all your traditional IRAs and Roth IRAs.
  • Tax treatment: Funds are contributed post-tax, which means the withdrawals are not taxed in retirement.

Roth IRAs can be powerful savings tools, but they differ from traditional IRAs. When you open a Roth IRA, contributions are made after you pay taxes on the money. While you don’t get the upfront tax benefit, Roth IRAs offer a unique perk once you retire.

“When you decide you want to withdraw money from the Roth IRA account, any earnings made in the account are tax-free,” said Joseph. “The investment must stay in the account for at least five years to qualify. With a Roth IRA, you are not compelled to begin withdrawals at age 70 and a half.”

Not everyone can contribute to a Roth IRA, however. The IRS implements income thresholds where if you make more than a certain amount, you can contribute either a reduced amount or nothing at all to a Roth IRA. These amounts typically change each year.


  • Who it’s best for: Business owners who want to offer their employees a retirement plan, as well as freelancers.
  • Contribution limits: In 2020, employers can contribute up to 25% of compensation or $57,000, whichever is less. Self-employed individuals can contribute up to 25% of their net earnings from self-employment (not including contributions for themselves), as much as $57,000. That limit jumps to $58,000 for 2021.
  • Tax treatment: Contributions are tax-deductible.

A simplified employee pension (SEP) IRA is a tax-deferred retirement plan for small-business owners, self-employed individuals and freelancers. Generally, SEP IRAs are good accounts for business owners who want to contribute to their employees’ retirements. With these accounts, the employer contributes on the employee’s behalf.


  • Who it’s best for: Small-business owners who want to make tax-deferred contributions to an employee’s plan.
  • Contribution limits: In 2020 and 2021, employers can contribute up to 3% of the employee’s compensation as an employer match, or 2% of the employee’s compensation if the employee doesn’t contribute. The employee contribution limit for 2020 and 2021 is $13,500.
  • Tax treatment: Contributions are tax-deductible and required every year.

A savings incentive match plan for employees (SIMPLE) IRA is for small-business owners — businesses with 100 employees or fewer — who want to offer a tax-deferred retirement plan. A SIMPLE IRA requires contributions from the employer, which can be made on their own or to match an employee’s contributions.

Employees are eligible if they received at least $5,000 in compensation from the employer in any two preceding years and are expected to earn at least $5,000 in the current year.

5. Rollover IRA

  • Who it’s best for: Employees with 401(k) accounts from past employers.
  • Contribution limits: The same as the contribution limits for traditional IRAs: up to $6,000 per year in 2020 and 2021 (or $7,000 if you’re 50 or older). You can roll over the full amount of your 401(k).
  • Tax treatment: Roll over your account balance, and all future contributions are tax-deferred.

Deciding exactly what you should do with a 401(k) when you leave a job can be tricky. Cashing it out causes you to lose money, so a better idea is to roll it over into an IRA. With this approach, you transfer the 401(k) funds into an IRA. The new rollover IRA allows you to keep the full balance and continue to contribute to your account. You can complete a rollover online within minutes through online investment companies.

6. Spousal IRA

  • Who it’s best for: Nonworking spouses.
  • Contribution limits: You can contribute up to $6,000 per year in 2020 and 2021 (or $7,000 if you’re 50 or older).
  • Tax treatment: Contributions are tax-deductible.

It can feel like your retirement options are limited if you aren’t working. The IRS allows nonworking or low-income spouses to contribute household income into an IRA to save for the future.

“In some situations where a married couple only has one party earning income, they are still able to create a spousal IRA and place money into the IRA for the benefit of the nonworking spouse,” said Joseph. “Provided you don’t exceed your earned income, you can essentially double your contributions into an IRA through the use of a spousal IRA.”

A spousal IRA can be either a traditional IRA or Roth IRA, depending on your preference and income. Depending on the account you choose, you can deduct the amount you contribute and watch the money grow tax-deferred over time. It’s a powerful option that can help your retirement nest egg grow as a couple.

How to open an IRA

Opening an IRA is a relatively easy process. To get started, identify which type of IRA is best for you. Then choose a bank or financial institution to hold your investments. Companies like Vanguard, Fidelity, TD Ameritrade and Betterment all offer IRAs.

Depending on the company you choose, you may need anywhere from $500 to $1,000 to open an account. Once you open the account — which takes just a few minutes online — you can choose your mix of investments to design your portfolio.

Not sure which investments to choose? Learn about mutual funds and ETFs and which is best for you.


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Required Minimum Distributions for Your 401(k): How to Calculate RMDs and Rules to Know

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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When you have a 401(k), you can save your money and put off paying federal taxes for years, even decades. To ensure you eventually do pay taxes on that money, the government requires you to start making withdrawals — your required minimum distribution (RMD) — from your account once you reach a specific age.

The rules around RMDs are strict, and if you don’t take out the minimum amount each year, you could end up paying hefty penalties. Here’s how RMDs work and what you can do to minimize your tax bill.

What is a required minimum distribution (RMD)?

Required minimum distributions (RMDs) are withdrawals you have to start taking from your retirement account each year at a certain age. The RMD amount is the minimum you need to withdraw, but you can always take out more than the required minimum. If you celebrate your 70th birthday on July 1, 2019 or later, you don’t have to start taking distributions until the year you turn 72.

You’re responsible for calculating your RMD and withdrawing the correct amount. You can calculate your RMD by dividing your tax-deferred retirement balance as of Dec. 31 of the previous year by the IRS’s life expectancy factor:

How to calculate a required minimum distribution

As an example, let’s say Mary is 74, unmarried and has $200,000 in her retirement account as of Dec. 31, 2019. In her case, she would use the Uniform Lifetime table to calculate her RMD. By using that table, Mary sees that her distribution period is listed as 23.8. To find her RMD, she would divide her account balance by that number ($200,000 ÷ 23.8). The result is $8,403.36 — that’s the amount she’d have to take out of her 401(k) account that year to satisfy the RMD rules.

RMDs are taxed as ordinary income. If you receive Social Security benefits and are wondering if Social Security benefits are taxable, keep in mind that your 401(k) RMDs can push your income into a higher tax bracket, impacting the taxes you may have to pay on Social Security.

RMD rules for 401(k) plans

When it comes to RMDs, it’s important to understand their rules and intricacies to avoid costly penalties. Below are some key rules you should keep in mind.


The deadline for taking your RMD is Dec. 31 each year. However, you can delay withdrawing the RMD until April 1 of the year after you turn 72 if you’re taking an RMD for the first time (or, in certain cases, until after the year you retire).


With your 401(k) minimum distribution, you can take out your RMD as a lump sum, or you can split it into smaller withdrawals throughout the year. Regardless of which method you choose, the withdrawals are taxed the same way.

Excess distributions

If you take out an excess distribution — meaning more than the RMD — you cannot apply the excess to the RMD for a future year. You’ll still have to withdraw the RMD the following year, even if you don’t need that money.


The penalty for not taking the necessary RMD is steep. If you skip the RMD or take out less than you’re required, the IRS will charge you a penalty that is 50% of the amount not taken on time. For example, if your RMD is $10,000 but you only took out $5,000, you would pay $2,500 in penalties (50% of the amount not taken out).

RMDs and other retirement accounts

If you have multiple retirement accounts, such as a 401(k) and an Individual Retirement Account (IRA), you may be thinking about taking out one RMD from a specific account rather than taking distributions from each account. When it comes to IRAs, you must calculate the RMD separately for each one, if you have multiple accounts. You can then withdraw the total amount from one or more of your IRAs. However, your RMD from your 401(k) must be taken separately from the RMD you take out of your IRAs.


If you withdraw your RMD and don’t need the money for your living expenses, you may be considering reinvesting your withdrawal. However, RMDs cannot be rolled over into another tax-deferred account.

If you’d like to reinvest your money, you can open up a taxable brokerage account, which does not have the tax advantages of a 401(k) or IRA.


RMDs are taxed as ordinary income, and you may owe both federal and state income taxes. There are three different ways to pay your taxes:

  • Lump sum in April: You can pay your tax bill as a lump sum when you file your annual tax return in April. However, if you owe money, you may owe a penalty with this approach.
  • Estimated tax payments: You can make quarterly estimated tax payments throughout the year. With this approach, you divide up how much you owe into four payments each quarter. By doing this, you may avoid the penalty that may come with making a lump sum payment on Tax Day.
  • Tax withholding: You can opt to have a portion of your RMDs automatically withheld to satisfy federal income tax requirements. Contact your 401(k) retirement plan administrator if you’d like to pursue this option.

How to avoid RMDs

If you’re worried about RMDs you may want to talk with a tax consultant or a financial advisor. There are also two strategies you can use to avoid RMDs:

  • Convert your 401(k) into a Roth IRA: If you have a 401(k) and want to avoid required minimum distributions, one option is to convert your account to a Roth IRA. Roth IRAs do not have RMDs. You’ll pay ordinary income taxes on the amount distributed, but after that, you no longer have to take RMDs or pay taxes on your withdrawals.
  • Keep working: If you continue working past the age of 72 and don’t own more than 5% of the company for which you work, you may be able delay distributions from your 401(k) until you retire. This option is not available for IRAs.

Exceptions to RMDs

While you can be exempt from RMDs if you’re still working or you convert your 401(k) to a Roth IRA, there are no other exceptions. However, if you miss an RMD, you may be able to have the penalty waived if you can prove the shortfall was due to a reasonable error and show that you’re making steps to resolve this problem.

To have the penalty waived, you must complete Form 5329 and attach a letter of explanation.

COVID-19 impact on RMDs

To help people affected by the coronavirus pandemic and the corresponding economic recession, the government passed temporary measures in the coronavirus relief bill (known as the Coronavirus Aid, Relief and Economic Security (CARES) Act) that affected RMDs and retirement accounts:

  • No RMDs required: For 2020, RMDs are not required. You can leave the money in your account untouched.
  • Return of RMDs: If you already took out your RMD for 2020, you may be able to return it to your retirement account so the money can continue to grow. If you can afford to do so, taking advantage of this measure can help you build your retirement nest egg.
  • No penalty for withdrawals: If affected by the pandemic, you can take out up to $100,000 from your retirement account before reaching age 59½ without having to pay a 10% early withdrawal penalty. This exception is only in place for distributions taken in 2020.

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