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When to Use Tax-Advantaged Accounts

January 13, 2021
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Tax-advantaged savings plans, like 401(k) plans and individual retirement accounts (IRAs), help your money grow faster than taxable investments, but they’re not always the right place for all of your savings. Here is a rundown on when one choice or the other might be appropriate.

Put your money in a tax- advantaged saving plan when:

  • Your employer matches your contribution. It’s rare that taking advantage of this free money doesn’t make sense.
  • You already have savings equal to at least three months of living expenses and, if you have dependents, adequate life insurance coverage.
  • You already own a home and are comfortably meeting your monthly mortgage payments.
  • You haven’t yet met your goal for a retirement nest egg and need the return-enhancing advantage of tax-free compounding to reach it.

Consider not contributing to a tax-advantaged plan when:

  • Either you’re already at the limit of your employer’s matching contribution or your employer doesn’t offer one. (Though even in these cases it may still make sense to contribute to your 401(k), as long as the plan’s fees and expenses are low, and it offers sufficient diversification.)
  • The investment choices in your employer’s plan charge high annual expense fees. The pre-tax advantage of contributing to a 401(k) plan can be eroded by fees.
  • You’re in a high tax bracket and want to invest in individual equities for long-term capital gains. Rates on long-term gains are well below the highest federal income tax bracket, and unless you contribute to a Roth IRA or Roth 401(k) plan, you’ll have to pay ordinary income taxes on the gains on stocks in a traditional IRA or 401(k) plan.
  • You want to diversify beyond the choices available in an employer’s retirement plan. If this is the case, you may still want to contribute to an IRA, but through an account with sufficient diversification options.
  • You want municipal bonds to be part of your portfolio. If you hold municipal bonds in a traditional IRA or 401(k) plan, any interest income, even tax-exempt income, will be taxed at ordinary income tax rates when withdrawn. It is better to hold municipal bonds in taxable accounts so the tax-exempt interest income is not taxable.

  

Randall Wealth Management Group and Vanderbilt Financial Group are separate and unaffiliated entities.
Vanderbilt Financial Group is the marketing name for Vanderbilt Securities, LLC and its affiliates. Securities offered through Vanderbilt Securities, LLC. Member FINRA, SIPC. Registered with MSRB. Clearing agent: Fidelity Clearing & Custody Solutions Advisory Services offered through Consolidated Portfolio Review Clearing agents: Fidelity Clearing & Custody Solutions, Charles Schwab & TD Ameritrade Insurance Services offered through Vanderbilt Insurance and other agencies Supervising Office: 125 Froehlich Farm Blvd, Woodbury, NY 11797 • 631-845-5100 For additional information on services, disclosures, fees, and conflicts of interest, please visit www.vanderbiltfg.com/disclosures

This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by Randall Wealth Management Group or Vanderbilt Financial Group. Material presented is believed to be from reliable sources and PSEC makes no representation as to its accuracy or completeness.