Non-retirement investing: Investment options outside of retirement accounts
Retirement accounts are where most people do the bulk of their investing. However, if you’re maxing out your IRA and 401(k) contributions and have extra income to invest, it may be time to look at other options.
As a group, retirement accounts are known as “qualified investment accounts" because they qualify for beneficial tax treatment:
Retirement accounts have annual contribution limits and penalties for early withdrawal, generally before you reach the age of 59½. Qualified accounts include employer-sponsored retirement plans like 401(k)s and 403(b)s. Traditional and Roth IRAs are also considered qualified due to the annual contribution limits and preferential tax treatment.
One reason employer plans are popular is that many employers match contributions, up to a limit. However, there’s another reason most people invest primarily through retirement accounts: inertia. Contributions are automatically taken from your paycheck, so you don’t have to think about it.
But because you’re already investing, you may not give much thought to other investment options.
The most common type of non-retirement investment account is a brokerage account. Brokerage accounts are non-qualified, taxable investment accounts that can include vehicles like stocks, bonds, mutual funds and exchange-traded funds (ETFs). You can open an individual or joint brokerage account through a licensed broker, on your own (referred to as a self-directed brokerage account) or using an automated investing platform.
While education accounts (such as a 529 plan) and Health Savings Accounts (HSAs) are also considered non-retirement accounts, they have different purposes, investment options and/or tax treatments than a brokerage account.
Get more details on opening and investing in 529 plans and HSAs.
A brokerage account is considered “non-qualified,” which means you’re investing with after-tax dollars. If you’re maxing out your 401(k) contribution and want to keep investing, that’s where a non-qualified account may come into play.
One benefit of non-qualified investments is the amount of control you have over them. With employer plans, you may be limited by what investments are available to that plan. A brokerage account, on the other hand, allows you to choose your own investments.
Another benefit is tax diversification. Non-qualified accounts allow you to be more strategic about how and when you access your money. Retirement accounts have rules around and penalizations for withdrawing money before you reach a specific age, generally 59 ½. With non-qualified accounts, you can withdraw money at any time, although earnings are typically subject to capital gains tax.
Finally, there are no limits on how much money you can contribute each year to a brokerage account.
Brokerage accounts are taxable, as they’re funded with after-tax money. You’ll pay taxes on the income you earn from yearly dividends or interest, as well as capital gains when you sell stocks. There are no limits to how much you can invest in them, making a traditional brokerage account a good option if you’ve maxed out contributions to your retirement accounts.
This is just a snapshot of the attributes of this type of account. Because of the complexities of each type of investment, it’s important to talk to a financial professional to ensure that your portfolio is as tax efficient as possible.
Before investing some of your earnings in a brokerage account, start by asking yourself these questions:
Ready to invest in a brokerage account? You should consider the following when determining the right investments for you:
Finding the right mix between retirement and non-retirement investments isn’t a one-size-fits-all proposition. Your personal goals, tolerances and circumstances mean that the portfolio that’s right for you is unique. However, having a diverse mix of investment accounts may provide more options to help you work toward your goals.
Offered by U.S. Bancorp Investments
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