A Taxable Brokerage Account May Be What Your Retirement Is Missing

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For many, funding a 401(k), IRA or other retirement account is the first order of business as they save for long-term goals, and for good reason: These accounts offer significant tax benefits.

But tax-advantaged retirement accounts come with restrictions on how much you can contribute and at what age you can make withdrawals without penalty. A taxable brokerage account adds some flexibility to your mix of investments.

Tax treatment and withdrawal rules

In a taxable brokerage account, you pay tax on interest, dividends and capital gains in the year you receive them.

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Capital gains from investments held for a year or less are generally taxed at your ordinary income rate, which can be as high as 37%, while gains on assets held for more than a year are taxed at rates ranging from 0% to 20%, depending on your income. There are no tax deductions for contributions to taxable brokerage accounts.

You don't pay taxes on investments in a tax-advantaged retirement account, however, as long as the money remains in the account. With a traditional IRA or 401(k), you get an up-front tax break on contributions and pay income tax on withdrawals.

With a Roth account, you pay income tax on your contributions, but distributions are tax-free in retirement.

Although taxable brokerage accounts don't offer special tax benefits, you won’t have to worry about contribution limits. So if you're maxing out your retirement plan, a taxable account can be a good place to direct extra savings.

In 2025, the most you can contribute to a 401(k) is $23,500 if you’re younger than 50. Workers ages 50 to 59 or 64 or older can contribute an extra $7,500, and those between 60 and 63 can make catch-up contributions of up to $11,250. The maximum IRA contribution in 2025 is $7,000 ($8,000 if you’re 50 or older).

Thinking of retiring early? You can withdraw money from a taxable brokerage account anytime without facing penalties, so funding a taxable account can provide you with savings to live on until you can tap your retirement accounts.

If you withdraw money from a traditional IRA or 401(k) before you turn 59½, you'll pay a 10% early withdrawal penalty in most cases. (With a Roth IRA, you can withdraw contributions anytime without penalty, but you must own the Roth for at least five years and be 59½ or older to avoid penalties on investment earnings.)

With both taxable brokerage accounts and Roth accounts, you don’t have to take required minimum distributions. If you have a traditional IRA or 401(k), you must take RMDs once you reach a certain age – currently, it's 73 – even if you don't need the money.

Depending on the size of your account, an RMD could push you into a higher tax bracket.

Along with rounding out your retirement portfolio, you can use a taxable brokerage account to save for a variety of other goals, says Cody Garrett, a certified financial planner and founder of Measure Twice Money. You might, for example, invest money to buy a car or a house in a few years.

Getting started

You can open a taxable brokerage account at major brokerage firms such as Charles Schwab, Fidelity Investments and Vanguard; many large banks also offer the accounts through their investment services.

You usually pay no fee to open a brokerage account, and many don't require a minimum investment.

Some firms impose annual account service fees, but they may be waived if you meet certain requirements, such as signing up to receive electronic statements or investing a minimum amount of assets.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Ella Vincent is a personal finance writer who has written about credit, retirement, and employment issues. She has previously written for Motley Fool and Yahoo Finance. She enjoys going to concerts in her native Chicago and watching basketball.