When to Include Taxable Accounts in a Retirement Plan

Invest part of your nest egg outside tax-sheltered accounts.

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We are bombarded with tax-advantaged choices in which to do our retirement saving, including 401(k)s and IRAs. However, there are several situations in which it makes sense to invest for retirement elsewhere, like in a taxable brokerage account. Here are a few valid reasons you might want to do some of your retirement saving outside of the traditional tax-sheltered accounts.

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1. You've maxed out your limits for the year. There is only so much tax-sheltered investing you can do. Tax-deductible 401(k) contributions are limited to $16,500 (plus $5,500 catch up contributions for those age 50 and older) in 2010. Traditional IRA and Roth IRA contributions are limited to $5,000 (plus $1,000 catch up contributions) in 2010. If you are fortunate enough to be able to save more than these maximums, then you might want to turn to a taxable account to do some more investing during the year. When the new year rolls back around, go back to contributing to your tax-sheltered accounts.

2. Your income limits your ability to contribute. Tax-deductible contributions to IRAs are limited by the modified adjusted gross income from your current year tax return. If your income is too high, you may need to turn to taxable accounts to do the rest of your investing.

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3. You want more flexibility. Taxable investing accounts are generally flexible in terms of how much you can contribute each year, as well as how much and how often you can withdraw your funds. If you need some flexibility with your retirement funds, then a taxable account may be the way to go, at least for portion of your savings. Another account you might consider using is a Roth IRA. Although you are limited on the amount you can contribute each year, Roth IRA withdrawals can often be completed with fewer restrictions.

4. You want to invest in tax-free investments. The government won't let you invest in certain tax-free bonds by using a tax-advantaged retirement account. You must invest in these funds using a regular taxable account.

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Keep in mind that both taxable investing and tax-advantaged investing should be a part of your overall retirement savings plan. Obviously it makes sense to gain as much of a tax advantage as you can, but if there is a valid reason, start investing with a taxable account. Taxable accounts can be opened at the same places you have your 401(k) or IRA. In fact, they may even give you a break on trading fees since you already have funds there.

Philip Taylor is the author of 104 Ways to Save Extra Money. Read his popular blog, PT Money: Personal Finance for more insightful money tips, like his recent suggestions for the best online checking accounts.