Susan's Scoop

The Case for the Taxable Brokerage Account

I feel like the taxable brokerage account doesn’t get much love - it doesn’t have the advantage of being made up of pre-tax dollars like a 401k or Traditional IRA, nor does it automatically have the advantage of being able to be withdrawn tax-free like a Roth. But I still think it’s an important part of a portfolio! Here’s why:

1) Liquidity: This money is always available! Yes, there are ‘better times’ (when the market is up) and ‘worse times’ (when the market is down) to sell, but you have complete control over accessing these funds as needed, which often isn’t the case with other types of accounts. Hopefully you have 6 months of expenses in an emergency account, but sometimes even bigger expenses come up where you need to quickly tap more money.

A couple of years ago, my husband’s car was hit and totaled by another driver. At the scene the driver was extremely apologetic and took total responsibility, but of course once insurance got involved, he denied any responsibility and tried to pin the blame entirely on my husband. (We now have cameras in all of our cars for this reason!)

Our insurance ended up paying out for our car, but because it was already 7 years old we didn’t get much – certainly not enough to go out and buy another vehicle. It was a big unexpected expense, but we were able to tap into our brokerage account to sell some stocks and get the funds we needed to get back on the road.

2) Tax advantages: Yes, this account may not have the shiny tax advantages of the other accounts mentioned earlier, but there are still tax benefits! Capital gains and qualified dividends are generally taxed at a much lower rate than ordinary income – a huge advantage of investment income.

If you can manage to withdraw long-term capital gains and qualified dividends in the 0% tax bracket (currently up to $48,350 single and $96,700 married), the tax impacts become THE SAME AS A ROTH – taxed up front, and no taxes at withdrawal! And you have much more liquidity and investing flexibility in this account!

3) Early Retirement: Want to leave your job before 59.5? A taxable brokerage account is a great place to build up a “bridge fund” to bridge the time between leaving your job and being able to tap into your retirement accounts!

4) More Investing Flexibility: Unlike retirement accounts, taxable brokerage accounts have no investing limits! You can add as much money as you want. Also, investment options are often limited in traditional retirement accounts, but with a taxable brokerage account, you can choose to invest in almost anything your brokerage offers – even funds with very low or zero fees, which can potentially grow your money even faster.

5) Borrowing Against Your Account (Leverage): Most people have heard of a Home Equity Line of Credit (HELOC) that you can take out against your home, but did you know there’s also an equivalent for taxable brokerage accounts? This is called a Securities-Based Line of Credit (SBLOC) and can be an incredibly useful tool in your financial toolbox.

I often tap into my SBLOC to fund real estate investments, and at my current interest rate of 5.7%, it’s a much better deal than taking out a conventional mortgage (7-8%) or using a hard money lender (12-15%). I make interest-only payments, and I can always sell assets to cover the interest or roll over the balance if I’m in a cashflow pinch that month.

So no, the taxable brokerage account doesn’t get a fun name or catchy acronym. But it is the one that shows up when you need it - whether that’s to cover a curveball expense, take advantage of an investing opportunity, or fund your “I’m outta here” plan before age 59.5. It can end up being the unsung hero of your portfolio. 😎

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What I'm Reading

​💻 Hertz Is Using AI to Scan Your Rental Car for Damage ​

Hertz is rolling out AI-powered tech to detect car dings and damage, which means you may soon be fighting with a robot over a scratch you didn't cause. I personally would much rather see them work on improving the slow and antiquated process to pick up a car, but if these AI scans are here to stay then it just underscores the importance of doing a full walk-around video every single time you rent.

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