A Taxable Brokerage Account May Be What Your Retirement Is Missing

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.

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