2 Reasons Your Taxable Account Is Your Slowest Growing Account

[@joeuser2360]

You didn't really touch on the main purpose of the taxable account until the end. The main thing is that a taxable account shouldn't be used for retirement savings. It should be use to meet your needs throughout your life so you don't have to touch your retirement account. Taxable accounts are for mortgages, major family expenses, and emergencies. The value of that liquidity for those needs offsets the reduced returns. The other things is saying that the taxable account is worse than retirement accounts. It may be semantics but the taxable account is the baseline savings vehicle with the default tax structure. The others are intended to be special with tax benefits designed to make them better than baseline savings accounts. Those special tax benefits are intended to promote saving for retirement. Where the taxable account is for generic savings.

[@Antandthegrasshopper]

I'm 59 and have 1M in Taxable A/C, and 2M in IRA/Roth IRA. I retired early at 55 and living off of dividends from Taxable A/C with some withdrawals and also Roth conversions. Taxable A/C has been a life saver as I'm able to do all these things although I pay higher taxes, it's all worth to me!

[@larryjones9773]

I didn't have a Taxable account when I retired, but I raided my home equity, and BOOM, I now have money in a Taxable account. I'm using my taxable account to live off of and pay taxes on Roth conversions, along with getting a 0% tax rate on my capital gains & dividends, I pulled cash out of my house with a cash-out refinanced mortgage in 2019, at a 3.75% interest rate.

[@jefflloyd394]

Wow, wow wow, what about withdrawal at 0% capital gains in order to use the cash to pay tax on Roth roll over, AND what about tax loss harvesting and gain harvesting at low capital gains rates ? Always good, thanks Eric. Jef

[@SafeguardWealthManagement]

Thanks! Would have to be a small Roth Conversion (I'm assuming this is what you mean by Roth rollover?), correct? Roth Conversion would push capital gains into higher brackets with a sizeable conversion? In general, gain harvesting is fantastic at low rates like 0%. Tax loss harvesting is a more complex issue.

[@jefflloyd394]

@@SafeguardWealthManagement yes, and very good, thank you Eric.

[@aswinos6077]

My wife and I have taxable, TIRA, and ROTH accounts. 1- we maxed out our TIRA (401k) first and since could not contribute to Roth, put $$ in taxable. 2 - we needed money in our taxable to pay taxes on our roth conversions once we retired. 3- while converting money to our roth, we kept almost all the growth in the roth and taxable so our IRA would not outgrow our ability to convert it, hence we kept the IRA in BND only. I recommend saving to Roth in early career, and switching to 401k when making higher salaries. Once you can max out the 401k, you kinda have to put money in taxable.

[@vchap01]

Brokerage account can grow quickly if you have RSUs or any sort of profit sharing plan. That money is taxed as soon as it is vested/distributed. I also invest my bonus in a brokerage account as well. It also allows a lot of flexibility in investments vs a retirement account, but that can be a plus or a minus depending on your investment skills and luck. But if your only income is salary, there is little reason to invest in it until you max out 401k, IRA and (if available) a mega Roth backdoor conversion.

[@Bonez1999]

I mean yeah.... but if your expenses are low and you can harvest gains from your taxable account at 0% federal capital gains tax rate, or close to it, you could essentially make your taxable account withdrawals into Roth withdrawals without the 59.5 age restriction The 0% long-term capital gains rate for a married household in 2024 is over $120k per year. It's a huge window to withdraw from at 0% each year

[@keithmachado-pp6fv]

Your videos are outstanding but you missed the boat on this one. The brokerage account is the most flexible and preferred account for money not needed. You decide when to take a taxable gain (never for me), pay zero or 15% on dividends, and can harvest $3k of losses each year against ordinary income. When you pass away your heirs get a step up in basis.

[@peter-hr1gl]

I have de-emphasized growth in my taxable account because the two remaining stocks I have in it (after liquidating all the others in 2022) because the two stocks have grown so handsomely over the past 20+ years that to sell any shares now would represent large capital gains. I don't need that account to grow larger (thankfully) and I'm keeping in in retirement as more of a safeguard account that may be needed to fund LTC, otherwise it will pass to my heirs at my death and they will inherit it at a stepped up cost basis and be able to sell or retain as they desire. It comes down to having a plan and a purpose and basing desired returns and investing on that plan/purpose.

[@Random-ld6wg]

i don't understand this. just because the 2 remaining stocks have had good growth and have a lot of ltcgs then you do not want to sell them. what was the goal of your investing, to have stocks that only grow by a small amount ? sell a portion as you need it and have the ltcgs get taxed at 0, 15,18.8 or 23.8%. still better than marginal tax rates. so for an extreme hypothetical case, you have a 1 cent principal that is now worth $1M. if you sell the whole position at once and not having any other income for the year, for MFJ and standard deduction, you will pay $179,364.85 for an effective tax rate of 17.9%. for 2M ltcgs, you'll pay $417365 and same scenario, that is only 20.9% effective rate. you don't have to sell the whole position at once. if you want to leave it to heirs then that is fine as well but i have heard other people make similar comments and never understood it.

[@dmulvany]

You can sell fractional shares with Fidelity and probably many other brokerages, so you have the choice to sell a very small part of a highly appreciated stock at a low tax rate.

[@keithmachado-pp6fv]

I have had a brokerage account for over 40 years and have not paid $1 of tax. I do take my $3k loss every year against ordinary income. I don’t need the money and have a large gain that will be stepped up for my heirs

[@TheBeagle1956]

Forty years and you take a $3,000 loss each year? 😂😂

[@martinguldnerAutisticSwanGuru]

He also missed the fact if your in the two lowest US federal tax brackets your dividend qualifieds are taxed at 0%. Like you I also use tax loss harvesting. My state taxes long term capital gains so I try to have a capital loss each year when I sell stocks in my taxable brokerage account.

[@keithmachado-pp6fv]

Yes I don’t have any cap gains so the max you can take against ordinary income is $3k ($2k in my state so I have about $40k of loss carryovers).

[@TheBeagle1956]

@@keithmachado-pp6fv I thought it was funny because I haven’t been able to do any tax loss harvesting in years with all the gains in the markets. I haven’t had any losses to sell, simply because I’ve held my stocks for so long.

[@Random-ld6wg]

​@@keithmachado-pp6fv in all these years,you never harvested a gain? your 40K loss is still carried over? doesn't your taxable generate any qualified dividends that eat up the carry over loss?

[@keithmachado-pp6fv]

Good point on dividends. I did have small dividends over the 40 years. Less than 1% of the account balance. Some at 15% and some at zero, let’s call it 10% average tax. All dividend were reinvested. Tax on the dividends in my IRA will be taxed higher.

[@MeltingRubberZ28]

Yeah exactly this.

[@jjjjj479]

Your growth issue #1 understates the advantage to 401k because it ignores inflation. If your cost basis was adjusted for inflation under the tax code, then you could get the correct result by just using an inflation adjusted growth rate and otherwise ignoring inflation. But tax law does not actually allow for the basis to be adjusted for inflation. Instead you would have to use a nominal growth rate not real, adjusted your contributions for inflation each year, and then compute the capital gains tax with the basis from summing those varying contributions. And then adjust back down for inflation if you want to get back to 2024 dollars. Alternatively, you could use the inflation adjusted growth rate, but then just "decay" the old contributions for inflation when using them to compute the basis.

[@keithmachado-pp6fv]

There are no RMDs in a brokerage account. Inflation only matters if you sell since There is no capital gains tax unless you sell. Also the tax brackets do adjust for inflation which offsets some of the issue (of course they adjust for IRAs too).

[@bonanzatime]

​@keithmachado-pp6fv Not under President Kamigula. She's gonna Tax unrealized gains!😮

[@joekuhnlovesretirement]

Outstanding. Not traditional thinking

[@peterwright837]

I had been making after tax contributions to my traditional IRA to take advantage of tax free growth. However, as I got closer to retirement I realized I was going to end up paying ordinary income tax rates on that growth rather than capital gains rates so I withdrew my last contribution and put it in my taxable account instead. Does it ever make sense to make after tax contributions to a traditional IRA if you can’t do Roth conversions?

[@Andocus1213]

It never makes sense if you cannot convert

[@peaceofcake8464]

Retirement accounts are ignored for college financial aid. Colleges expect you to spend 5% per year from your non-retirement accounts for college.

[@chuckk8851]

Unless your child attends a school that also requires the CSS Profile, which does ask about your retirement accounts and other financial info like the value of your primary residence, mortgages, etc.

[@peaceofcake8464]

@@chuckk8851 They ask about those things, but it isn't included in the calculation of the financial aid award.

[@MeltingRubberZ28]

Flawed video. Wait until RMDs kick in and the traditional account is taxed at 30+% and the taxable brokerage is still at 0, or 15% worst case.

[@keithmachado-pp6fv]

Yes it’s zero if you don’t sell. Hint I have never sold a stock except to harvest a loss. Reinvest all dividends. It works for me.

[@MeltingRubberZ28]

​@@keithmachado-pp6fvlong term cap gains are 0% up to 95k so it's not just in the case of selling.

[@alphamale2363]

​@@keithmachado-pp6fvIt's also zero if you are in the zero % capital gains bracket.

[@jjjjj479]

I expect my RMDs will be at about the same level as I would be taking out anyway to pay my bills. If your RMDs are so high, then you done screwed up your planning.

[@MeltingRubberZ28]

@jjjjj479 you're missing the point. I'm paying 0% tax on qualified dividends right now. Assuming I stay in the same tax bracket during retirement I will pay 0% on the capital gains. The only scenario that differing taxes is better is the one they chose for example. You will pay taxes on every dime in that differed tax portfolio.

[@j10001]

Excellent analysis !

[@thecalculator80]

He mentions the commutative property of multiplication. This principle is what basically says that a Roth and a Traditional are equivalent (when tax rates don't change). This presentation would be much more straightforward and obvious if it had compared the taxable account to a Roth account. The initial tax would be identical, and the 30 year values would be closer, with less discussion of tax rates and no RMDs. Unfortunately, Roth accounts did not get legalized until 1997, so I am facing the question of which retirement account do I spend from. If my RMD had stayed in the Traditional account, it would have generated growth taxable at ordinary rates. If I take the RMD and put it in a taxable account, it will generate growth at a far lower rate, especially if I leave it to my heirs.

[@ld5714]

Good discussion about this important topic. I'm sure many of your followers will benefit greatly from this presentation. Always great content Eric. Larry, Central Valley, Ca.

[@Random-ld6wg]

i like the flexibility offered by my taxable account. i always maximized whatever retirement vehicles that were available to me but i contributed to my taxable accounts early on. a painful experience was paying tax on a lot of capital gains on assets that dropped in value as the investors who stayed put were left holding the bag during the large bear markets of 2000 and 2008. in early retirement at 55, i am using it for roth conversion tax payments and living expenses. i assume i have to pay 10% on any withdrawals(principal and ltcgs) as tax from the account. some withdrawals will consist of 75% gains, others are much smaller percentage in gains. this balances out and is a good estimate in my case.

[@CalmerThanYouAre1]

So many advantages to taxable account that we’re not mentioned here. The ability to collateralize and borrow against it being one of the main ones. As well as the ability to apply leverage. Adding a little bit of margin leverage to an account of the S&P 500 erases any taxation on the dividends and enhances the long-term return above that of the IRA account. It also provides a tax shelter during withdrawal.

[@patienceisalpha]

* in the US. Taxable may not be so much taxable outside the US. the 'death and taxes` thing is wrong.

[@potato9514]

Something I never understood and feels like is never addressed in these videos and correct me if I’m wrong, but let’s say you earn enough to max out either trad or Roth 401K, wouldn’t you technically be able to contribute more to the Roth? Like $23k post tax contribution would be something like being able to contribute $30k pre-tax (not exact math but hopefully you get the point). If a person is making enough to max out the 401k and have an additional brokerage account, why wouldn’t they do a Roth? Why always assume people who are rich enough to have all these accounts contribute less in the roth 401k? Can we run numbers where both trad and Roth IRAs are maxed out and then whatever is left over is put into a brokerage or whatever is the next best option and see how the two strategies compare?

[@jeffb.2469]

Ugh. In an IRA I can hold Mutual Funds that align with my risk allocation. I'm not supposed to hold these type Funds or Bonds in my Brokerage account because they are not tax efficient. So what types of funds do you keep in the Brokerage account while limiting your exposure to Stocks?

[@MeltingRubberZ28]

@jeffb.2469 SCHD is a dicidend ETF with mostly qualified dividends and sees OK growth. It is stocks though. I'm in SP500 index which is very tax efficient. Dividends are mostly qualified as well. I don't think anything but stocks will be tax efficient though - I think that's really the requirement for long term capital gains.

[@jeffb.2469]

@@MeltingRubberZ28 Thanks for the reply. I purchased SCHD in the Brokerage for the first time this year, so I should see what impact this has on my taxes.

[@MeltingRubberZ28]

@jeffb.2469 VYM is another. That, as of last year was 100% qualified dividends. Best of luck!

[@rickyaz8640]

You’re gonna need $ to live. Liquidity is critical and extremely valuable and can even out tax hits from withdrawing from deferred retirement accounts. Tying everything up in retirement accounts is a fundamental error

[@kckuc310]

I disagree with your chart between taxable and tax deferred plus taxable has many advances including spending before retirement

[@stevenmeulink2177]

For those who are charitably inclined, buy no-dividend stocks, gift big winners to charity, and tax loss harvest $3000 per year. Suddenly the leaky bucket is flowing the opposite direction.

[@keithmachado-pp6fv]

Here is what makes me laugh. This exact same argument is why I don’t convert to a Roth. Your argument for the tax deferred account comes out the same ahead of a brokerage account as a Roth if you don’t recognize any capital gains. The brokerage then has all the same benefits as a Roth with the added advantage of being able to recognize capital losses. In other videos Roth are advised. Please explain.

[@Random-ld6wg]

do you not think a roth is better than a taxable brokerage?if you buy and hold long enough in a diversified holding, you never see much loss that can be harvested in whatever investment account that you have it in.

[@keithmachado-pp6fv]

A Roth is ok if you need the tax free income but I already have more than I will ever need between cash value life insurance and basis in my brokerage account. Both are likely going to my kids tax free and I will live off the taxable IRA and SS.

[@bonanzatime]

Who knew common sense could be 'so simple'?😅

[@CC-sf8jn]

Depends on 11/5/24 winner. One side wants to raise capital gains tax rate and tax unrealised capital gains. How long before the step up in cost basis after your death for your heirs is gone as well?

[@MeltingRubberZ28]

@@CC-sf8jn better not vote for that one then

[@foilcap]

Unless you have losses that you cannot deduct from gains in retirement accounts.

[@julieg.5718]

This one was too dense and complicated

[@ronaldvertrees9919]

Your other videos have been sound but here you have really lost the plot, contradicting the very lessons you yourself have taught. Sequence of taxation is irrelevant and only rates matter. Only outside of tax deferred accounts can one benefit from capital gains preferential rate and step-up basis at inheritance.

[@keithmachado-pp6fv]

I agree. His videos are outstanding but this one does contradict others, especially the Roth conversion ones.

[@SafeguardWealthManagement]

Can you expand on where you see the contradiction?

[@keithmachado-pp6fv]

Other videos say Roth is better given the same fact pattern as this one indicating traditional is better. The example of a higher balance being taxed when withdrawn from a traditional IRA being better than brokerage vs other videos saying convert to Roth. If you don’t recognize gains in brokerage or can recognize them in zero bracket which can be done pre SS if not converting, the math is the same plus the brokerage gives you the added benefit of cap losses not available in a Roth.

[@SafeguardWealthManagement]

@@keithmachado-pp6fv I don't think I've ever said Roth is better or traditional is better. It all depends on someone's situation. For instance, say you have someone who was a high earner throughout their working career and, therefore, found themselves in high tax brackets while working; traditional contributions will play out far better. Now, they might need to Roth convert in retirement but you don't convert everything to Roth because Roth is better, your goal is to convert at lower rates than you would otherwise see in the future if you kept those monies in traditional. Yes, there may be a small period in retirement where 0% capital gains and money in Roth are more or less tax equivalent. But this is an extremely short period for most retirees and still does not equal out the math from the full life cycle of contribution to withdraw.

[@keithmachado-pp6fv]

I appreciate the response and also realize my situation is unique. If you look at my earlier post, I have had a brokerage account for 40+ years and never paid $1 in cap gains, although I do take cap losses each year against ordinary income. I have alot of unrealized gains that I don’t plan on touching and will go to my heirs tax free with a step up in basis. I plan on living off my IRA for the next 7 years then SS and IRA, trying my best to spend it all down but if I die sooner than planned I have life insurance that will cushion the tax burden for my heirs (not to mention they will inherit a larger balance because I have drawn down less). I have been getting educated on Roth conversions and do see benefit, particularly considering the widow trap. Putting that aside, RMDs don’t really ramp up until your mid 80’s, at which point paying a bit more tax or a market decline will have minimal impact because you have fewer years to fund. However, if you convert aggressively between ages 60 and 65 when you may have 25+ years to fund, a big market correction can be devastating to your portfolio that is already smaller due to pre paying the tax on the higher value. In addition, I already have more tax free assets than I will ever need between cash value life insurance and basis in my brokerage account plus cash equivalents. So I don’t need a Roth other than for my heirs (who will be fine).