Should You Save for Retirement in a Taxable Investment Account?

By  Opher Ganel

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While tax-advantaged retirement accounts are often a great choice, there are several situations when a taxable account may better serve you.

Are tax-advantaged accounts good or bad for retirement investing?

For most of us, the answer is that they’re good, up to a point.

For example, if you’re earning a lot more now than you expect to spend in retirement, delaying taxes until retirement makes a lot of sense.

If you make a lot less now than you expect to spend in retirement, a Roth IRA or Roth 401k makes great sense – you pay lower taxes now and then pay no taxes on any of your withdrawals in retirement.

So, When Are Taxable Accounts Better?

Despite the above, there really are nine situations when using a taxable investment account for retirement investing is great.

1. You have no access to an employer retirement account

Some employers don’t offer a retirement account. Or, they may limit access until you’ve worked for them long enough and you want to invest money for retirement now.

2. You have access to an employer retirement plan, but there’s no match and fees are high

Some retirement plans have very high fees, so your long-term results will suffer. If, in addition, your employer offers no match, investing in such a plan is a bad idea.

3. You have access to an employer retirement plan, but the investment options have a poor record

All employer retirement plans have a limited set of investment options. If all the options in your employer’s plan are poor performers, you’re better off investing elsewhere.

4. You want to invest in asset classes not available in your employer’s plan

Employer retirement plans mostly limit you to mutual funds invested in stocks and/or bonds. If you want to invest in real estate or crypto (not my thing!), you’d be better off using a different account, even if it’s taxable.

5. You want to invest more than IRS limits allow

Each year, the IRS sets limits for how much you’re allowed to contribute to tax-advantaged funds. This is true for IRAs, 401(k) plans, 403(b) plans, and even Health Savings Accounts (HSAs) that aren’t considered retirement plans but are actually better for retirement than most “official” retirement plans.

If you’re privileged enough to be making so much that you can afford to invest for retirement more than those limits allow for, taxable accounts are your way to do just that.

6. You make too much to contribute to a Roth IRA

If you make too much, the IRS doesn’t allow you to contribute to Roth IRAs. You could consider making a so-called “back-door contribution” by contributing after-tax dollars into a traditional IRA and then converting them into a Roth IRA, but that’s a complicated process that may not be worthwhile if you already have a high balance in your traditional IRAs.

7. You make too much to deduct contributions to traditional IRAs

The IRS also doesn’t allow you to deduct your contributions to a traditional IRA once your income exceeds certain levels. You can still contribute with after-tax dollars and taxes on your earnings will be deferred. However, without the benefit of deferring taxes on the contribution, contributing to a traditional IRA is far less compelling.

8. You want penalty-free access to your investments

In some situations, you may want to have access to your investments in situations when the IRS assesses penalties on withdrawals from retirement accounts.

If that’s you, a taxable account is best.

Note, however, that once a Roth IRA has been open for five years, you can withdraw your contributions tax- and penalty-free at any time. If you go this route, you can’t later put the money back into the Roth account.

9. You plan to invest in assets that already enjoy preferential tax treatment

If you plan to invest in, say, individual stocks that you’ll hold for the long term, a taxable account is likely best for you. That’s because capital gains in taxable accounts aren’t taxed until you realize them by selling shares. At least as important, even then, the long-term capital gains tax rate is far lower than rates for regular income, which is withdrawals from non-Roth retirement accounts are taxed.

In addition, as Michael Hunsberger, ChFC®, Owner, Next Mission Financial Planning, LLC says, “Taxable investment accounts receive a step-up in basis at the death of the owner. If you plan to leave the investment account to your heirs, you could purchase non-dividend-paying investments and hold them until your death, and the capital gains would never be subjected to taxes. You could also donate appreciated shares for a tax deduction of their appreciated value if they’re held for over a year.”

Nick Covyeau, CFP®, Owner and Financial Planner at Swell Financial, adds, “If your adjusted gross income (AGI) and spending are low enough in retirement, you may even be able to live off distributions from your taxable account tax-free, allowing you to delay Social Security and letting your tax-advantaged retirement accounts grow uninterrupted without paying current taxes.”

The Bottom Line

While tax-advantaged retirement accounts are a great choice in many, if not most, circumstances, the above are nine situations when a taxable account might serve you better.

As David Edmisten, CFP®, Founder, Lead Advisor, Next Phase Financial Planning, LLC, says, “Although taxable accounts don’t offer the tax benefits of a 401k, IRA, or Roth IRA, they offer several advantages for retirement savings: no contribution limits, no income limits, penalty-free withdrawal anytime, and lower tax rates applied to gains.”

If nothing else, the uncertainty of future changes to tax laws makes it wise to diversify your retirement-investment account types so you can pick and choose from which account you want to withdraw how much once you’re retired. 

To have the greatest flexibility to optimize your tax planning in retirement, have significant amounts invested in:

  • Tax-free Roth accounts and HSAs
  • Tax-deferred traditional retirement accounts
  • General taxable investment accounts

Finally, having a good chunk of your retirement investments in a taxable account will reduce your eventual Required Minimum Distributions (RMDs).

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

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About the Author

Opher Ganel

My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals.

Connect with me on my own site: and/or follow my Medium publication:

To make Wealthtender free for readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a conflict of interest when we favor their promotion over others. Learn more. Wealthtender is not a client of these financial services providers.
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