One of the things you’ll know about us at Money Meets Medicine is that we’re big proponents of saving or investing money. When you get to the point as a physician where you think, “All right, I’m going to start investing money”, your next question usually is:

“How do I do that?”

For a lot of physicians, one of the easiest ways to get started is by investing through your retirement accounts at your job. Many doctors choose to invest through retirement accounts because of the tax benefits that those accounts give you.

But a taxable brokerage account is an investment option outside your typical retirement accounts.

Then the question becomes, “If I have so many tax advantages by using pre-tax accounts with my typical employer retirement accounts, why would I ever use any other kind of account?”

Great question. Let’s dive into the superpowers of a taxable brokerage account.

What a taxable brokerage account actually is

Apps like Robinhood, Acorns or Stash, are different companies that allow you to invest in taxable accounts. Mainstream brokerage firms like Vanguard, Fidelity, or Schwab all have different kinds of taxable accounts that you can open, too.

The difference between a taxable account is that it uses post-tax money, whereas those retirement accounts are typically pre-tax. So in theory, you get paid, you take that money home after you get taxed, and then you invest it inside of a taxable brokerage account.

With a taxable account what you put in doesn’t get taxed again. And if you hold any gains to the account for longer than a year, you benefit from long-term capital gains. Those tax rates can be anywhere from 0% to 15% depending on how much money you make.

For most doctors, 15% is lower than the 25 – 30% you’re probably paying normally. And so that can have some benefits if you hang onto it for longer than a year. But if you don’t and you sell it even at 355 days, then you’ll have short-term capital gains and pay ordinary tax.

Benefits of a taxable brokerage account over other accounts

The big question is if you get tax advantages in a pre-tax account or a Roth account where it never gets taxed again, why would you ever consider a taxable or brokerage account? Shouldn’t you just use those funds because you have access to tax advantaged space?

There are several benefits, actually.

A taxable brokerage account offers flexibility

Unlike those accounts where there’s a 59 and a half year rule, you can touch the funds in a taxable account long before that.

One of the things with retirement accounts is they’re supposed to be used for retirement. Barring extenuating circumstances, you can’t really take out the money once you put the money in. So although they give you a lot of tax advantages, there are rules in place about when you can take your money out, should you need it.

But what if you’re trying to build wealth for your family, set yourself up to retire early, and you want that money sooner? Maybe you’re 42 and you’re not retired yet, so you can’t access your retirement accounts, but you need that money. What if you want to start a business? Or invest in real estate? What do you do then?

Taxable accounts offer more flexibility not only in timeline, but in terms of what you use it for, whether it’s paying for your kid’s college education or buying a new house.

You can do tax-loss harvesting with a taxable brokerage account

When you invest in a taxable account and it loses money, you can technically have Uncle Sam sharing your losses. That’s what tax-loss harvesting allows you to do.

Let’s say you’re invested in the Vanguard Total Stock Market Index Fund, and that fund loses value. Essentially, you can write off up to $3,000 losses per year from your active income each year.

What does that mean? When you make money investing, it’s called passive income. When you’re working as a physician and you’re earning a paycheck, that’s called active income.

So whenever you’re tax-loss harvesting, which is what we just described, you can write off up to $3,000 per year from your active income. It doesn’t equate to $3,000 of tax savings. It just means your taxable income decreases by $3000, which is still a benefit in our book.

Taxable brokerage accounts can help you build a donor advised fund

Another benefit is that instead of taking the losses for tax-loss harvesting, any gains that you take can be contributed to a donor advised fund. As that gets large enough, you can contribute a sizable donation to your church or your favorite charity, which is tax smart in itself.

You can be as hands-off as you want with a taxable brokerage account

Taxable brokerage accounts are something that a robo-advisor can be involved with. They can do that tax-loss harvesting for you, they’ll rebalance your asset allocation every year to reflect the one that you want. For busy doctors who want to reap the rewards of a taxable brokerage account without adding another thing to your plate, robo-advisors take some of the manual things you’d otherwise have to be doing off the table.

Summary

Once you’ve maxed out your 401k or your 403b, your HSA, your 457, your backdoor Roth IRA, if you still want to invest extra money, you can do that through a taxable brokerage account. There’s no limit to how much you can invest.

But each person has to decide if a taxable brokerage account is what they want to pursue. Personal finance is personal, so your needs are going to be different based on your situation. It’s important to consider your particular situation in terms of what you invest in.

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