We heard from many investors that they had never thought to use a brokerage account to help save for retirement. In fact, there are several types of accounts you can use to build your retirement portfolio.
Typically, FutureAdvisor recommends maximizing your savings into tax-advantaged accounts such as your employer 401(k) or your IRA. However, there could be circumstances where a brokerage account could be more beneficial, or could be used in addition to your tax-advantaged accounts. Some examples include investors who have already maxed out their 401(k)s, as well as those who are nervous to save into a retirement account due to the penalty for withdrawing before age 59 ½.
Let’s look at the benefits of a brokerage account and then quickly review the other primary investment accounts one can use to help save for retirement.
A brokerage account is an after-tax account. Meaning, the money you deposit has already been taxed. Said another way, you do not get a tax deduction for contributions to a brokerage account. Transactions (buys, sells, and rebalances) within the account typically do have tax implications.
In addition to saving in a 401(k) and an IRA, saving in a brokerage account has advantages and disadvantages. Let’s take a look:
- You can withdraw money anytime without penalty
- There are no contribution limits, income restrictions, or Required Minimum Distributions (RMDs)
- Tax-Loss-Harvesting opportunities during market downturns
- A broad range of investment options, including low-cost ETFs
- Inheritance benefits through a “step-up” in basis to heirs
- No tax benefit in the year of contribution
- May be considered during college financial aid applications
Here's a summary of common retirement accounts and their characteristics
401(k) / 403(b) / TSP
An employer-sponsored retirement account. May receive a tax deduction if your contributions are pre-tax. Contributions have a yearly cap, with a “catch-up” contribution for those 50 or older. Early withdrawal penalties typically apply for withdrawals before 59 ½. Employers decide plan options but fortunately many employers are now offering more robust choices with lower fees than before. Some plans are great, others are not. Some employers offer a match, which is usually capped at a fixed amount. Transactions within the account, including buys, sells, and rebalances, do not have tax implications because the investments are “sheltered” until retirement. Withdrawals in retirement are taxed at your ordinary income rate at the time (Roth contributions are the exception -- as they are post-tax contributions and are not taxed upon withdrawal.) Read more about how FutureAdvisor Premium helps with your current employer 401(k).
A self-sponsored retirement plan that can be opened or held at almost any financial institution. May receive a tax deduction if income limits and 401(k) access criteria are met. Contributions have a yearly cap, with a “catch-up” contribution for those 50 or older. Early withdrawal penalties typically apply for withdrawals before 59 ½. (Roth IRA’s have some withdrawal exceptions.) Like a 401(k), transactions within the account do not have tax implications because the investments are “sheltered” until retirement.
The above account types are the most common, but there are also others. These are usually for more specific situations and include SEP-IRA, Solo 401(k), Keogh, 457, 401(a), and others.
How do I know which accounts to save into?
Typically, FutureAdvisor recommends maximizing your savings into tax-advantaged accounts such as your employer 401(k) or your IRA. But those accounts can have penalties for accessing the money before age 59 ½. A brokerage account on the other hand, can be a great choice for those who may need the money before retirement. (It can also be used to save for shorter term goals such as a downpayment or wedding.)
Though it may not be intuitive at first, investors can use a brokerage account to help save for retirement. This is especially important for those savvy investors who already max out their tax-advantaged accounts! In that scenario, you could have a 401(k), an IRA, and a brokerage account all working together towards your retirement goal. FutureAdvisor can manage all of your accounts holistically, giving the algorithm the chance to optimize placement of certain asset classes in the various types of accounts. (This strategy is known as tax-efficient asset placement and is described in more detail here.) Multiple accounts also provide greater drawdown flexibility in retirement by giving you greater control of how much taxable income you receive each year.
Other benefits of having multiple accounts managed by our algorithm include:
- Tax-efficient asset placement across all your accounts
- Comprehensive asset allocation
- Automatic rebalancing across all accounts
Already have a brokerage account and want to add it to your FutureAdvisor profile? No problem! Link it using the My Accounts page.
Want us to manage your brokerage account holistically with your other FutureAdvisor managed accounts? Click here to include it for Premium management.
Whichever account you chose to save in, remember to save early and often!
Disclaimer: The views expressed are for informational purposes only and are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities by FutureAdvisor. All expressions of opinion are subject to change without notice in reaction to shifting market, economic, or political conditions. The investment strategies mentioned are not personalized to your financial circumstances or investment objectives, and differences in account size, the timing of transactions and market conditions prevailing at the time of investment may lead to different results. Clients may lose money. Past performance is not indicative of future results. Investments in securities involve the risk of loss. Any tax strategies discussed should not be interpreted as tax advice and do not represent in any manner that the tax consequences detailed will be obtained. Clients should consult with their personal tax advisors regarding the tax consequences of investing.