Breaking down Taxable vs. Roth vs. Traditional: finding the right accounts for success.
Taxable Brokerage Accounts
A taxable brokerage account is a flexible investment account where you can buy and sell stocks, bonds, ETFs, mutual funds, and other assets. Unlike retirement accounts, there are no income limits or contribution caps.
Key Features:
No Contribution Limits: You can invest as much as you want, making it an excellent option if you’ve maxed out your retirement accounts.
No Withdrawal Penalties: You can withdraw your money anytime without penalties, but you’ll pay capital gains tax on your earnings.
Capital Gains Tax: Profits from selling investments are subject to capital gains tax. Short-term gains (assets held for less than a year) are taxed at your ordinary income rate, while long-term gains (assets held for over a year) are taxed at a lower rate.
Best For: Investors looking for flexibility, the ability to invest larger sums, or those saving for goals other than retirement, like buying a house or funding a child’s education.
Roth IRAs
A Roth IRA is a retirement account that allows your investments to grow tax-free. You contribute to a Roth IRA with after-tax dollars, and as long as you follow the rules, you won’t pay taxes when you withdraw your earnings in retirement.
Key Features:
Tax-Free Growth: Your investments grow tax-free, and you won’t pay taxes on your withdrawals in retirement, as long as you’ve held the account for at least 5 years and are over 59½.
No RMDs: Unlike traditional IRAs, Roth IRAs don’t require you to start taking distributions at a certain age, giving you more flexibility.
Income Limits: For 2024, single filers must have a modified adjusted gross income (MAGI) under $153,000, and married couples filing jointly must be under $228,000 to contribute directly. If you exceed these limits, you may be able to contribute using a Backdoor Roth strategy.
Contribution Limits: You can contribute up to $7,000 per year ($8,000 if you’re 50 or older).
Best For: Younger investors who expect to be in a higher tax bracket in retirement, those who want tax-free income in retirement, and people who value flexibility and don’t want to worry about RMDs.
Traditional IRAs
A traditional IRA is another popular retirement account where contributions may be tax-deductible, depending on your income and whether you or your spouse have access to a workplace retirement plan.
Key Features:
Tax-Deferred Growth: Your investments grow tax-deferred, meaning you won’t pay taxes until you withdraw the money in retirement.
Tax-Deductible Contributions: Depending on your income, you may be able to deduct your contributions from your taxable income, lowering your tax bill now.
RMDs: Traditional IRAs require you to start taking Required Minimum Distributions (RMDs) at age 73, even if you don’t need the money.
Contribution Limits: The same as Roth IRAs — $7,000 per year ($8,000 if you’re 50 or older).
Best For: Investors who want to lower their taxable income now, expect to be in a lower tax bracket in retirement, or prefer the immediate tax benefit.
Which One Should You Choose?
Choose a Roth IRA if: You’re okay with paying taxes now in exchange for tax-free income in retirement. This is especially advantageous if you’re in a lower tax bracket now than you expect to be in the future.
Choose a Traditional IRA if: You want to reduce your taxable income now and prefer to defer taxes until retirement. This is beneficial if you’re currently in a high tax bracket but expect to be in a lower one when you retire.
Choose a Taxable Brokerage Account if: You need more flexibility, want to invest larger amounts, or have already maxed out your retirement accounts. It’s also a great option if you’re saving for goals other than retirement.
Maximizing Your Investments at IT Millionaire
At IT Millionaire, we encourage a strategic approach to investing. You don’t necessarily have to pick just one type of account — you can use a combination to balance immediate tax benefits, future tax-free growth, and overall flexibility. For instance, you might max out your Roth IRA each year and invest any additional savings into a taxable brokerage account.
As always, consider your current financial situation, future goals, and tax implications when deciding where to invest your hard-earned money. Always consult a professional before taking any advice or making any changes or actions on your investments or other accounts.
