Regular Taxable Investment Accounts
Saving in regular taxable investment accounts can be a great way to build wealth. Provided you structure your portfolio correctly; taxable accounts can be used to provide tax-efficient investing through capital gains management, give you the ability to use tax gain/loss harvesting to reduce current and future tax liabilities, and diversify your holdings.
Before you even think about opening any taxable investment accounts, you need to ensure you have completed these five tasks:
- Complete your Emergency Fund savings. The general rule of thumb is 6 months worth of expenses. You can determine how much you actually keep in reserve based on how comfortable you feel with your income and expenses, job stability, and family circumstances.
- Except for your mortgage, be debt free. You will need to weigh the benefits of whether it is more advantageous for you to accelerate your mortgage payments, invest in a taxable account, or do both at the same time.
- Max out contributions to your employer sponsored retirement plan every year.
- Max out contributions to your Roth IRA every year.
- If you have children, fund some of their education by contributing to a Coverdell ESA or a 529 plan.
If you have completed these tasks, you are living in financial freedom. Congratulations! You are free to do as much taxable investing as you want.
Taxable investment accounts allow you to trade stocks, mutual funds, ETF’s, bonds, and give you access to advanced trading techniques. In a taxable account, you may be eligible for margin borrowing and derivatives trading. The most common types of derivatives are options and futures.
Types of Taxable Investment Accounts
Cash – Investing in taxable accounts on a cash only basis gives you access to all available investment instruments. Trading in a cash only account gives you the assurance that you can never lose more money than you have invested.
Margin – Margin is a loan from a brokerage. Buying on margin or margin trading is the term used when an investor borrows money from their broker to purchase securities. Margin is used by investors to leverage, or amplify, their returns to increase profit. Conversely, margin amplifies losses as well. Buying on margin can cause you to lose more money than you had originally invested because you will still have to pay your broker back if you suffer losses.
Taxable Investment Account Ownership
Individual – A brokerage account established for one person. It is a self-managed account where you have complete authority to make investing decisions. Individual accounts can be established as a cash or margin account.
Joint – A brokerage account established for two or more people. It is a self-managed account where all parties involved have joint decision making authority over the investments held in the account. Joint accounts can be established as a cash or margin account.
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