The Benefits of After-Tax Saving
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By: Michael Foster CFA, CFP®
What first comes to mind when thinking of exercising? For me, I tend to think of cardio-heavy activities or lifting weights. I don’t think I’m alone in this. If you walk into your standard local gym, I’d bet that most of the workout space is occupied by treadmills, ellipticals, stationary bikes, machines for specific muscle groups, and free weights.
What I often forget, but are just as important, are flexibility exercises. Whether it’s simply stretching before and after a workout, yoga, or that weird bench seat thing that I can never figure out how to use (if you know what I’m talking about please tell me what I’m doing wrong), flexibility is an important part of any workout routine.
Your 401(k) or IRA, like cardio and weightlifting, likely comes to mind when thinking of retirement saving and for good reason. These accounts, whether Traditional or Roth, provide valuable tax benefits and incentives to save today. What often gets overlooked for retirement savings is the taxable brokerage or trust account. Like stretching, these accounts can provide flexibility in your portfolio. They have their own set of benefits that make them a powerful tool for retirement saving.
Additional Flexibility
One of the primary features of taxable brokerage accounts is their flexibility. Unlike retirement accounts, there are no restrictions on when you can access your funds. Whether you're saving for a short-term goal like a down payment on a house or a long-term aspiration like retirement, this account provides the freedom to withdraw funds at any time without penalties. They also provide flexibility to draw from the portfolio while in retirement but before required minimum distributions on pre-tax retirement accounts (e.g. 401(k) and Traditional IRA) begin.
No Contribution & Income Limits
Traditional retirement accounts come with contribution limits. Depending on the type of account, they can also have income limits. For high earners or those able to save beyond these limits, taxable accounts allow them a vehicle for that additional saving. You have the liberty to contribute as much as you want and are able, allowing for more substantial wealth accumulation over time.
Different Tax “Buckets”
We think it’s important to have assets across different tax “buckets”, or money that is taxed differently by account. By having a mix of tax-deferred, Roth, and after-tax accounts, you gain the flexibility to control the timing and source of your income during retirement, potentially minimizing your tax burden. For instance, there are no required minimum distributions from taxable accounts, allowing greater control of when assets are taken from the account. Those that concentrate in one bucket don’t have as much flexibility when it comes time to withdraw from the portfolio.
These benefits and others can support saving in an after-tax account. Having additional flexibility, being able to contribute despite limits and income, and diversifying tax liability can benefit you at the start of retirement and beyond.
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Ben Dolan and Michael Foster are investment advisor representatives of Dolan Capital Advisors a North Carolina state-registered investment adviser. Investment advice offered through Dolan Capital Advisors, Inc.