David John MarottaDavid John Marotta is the President of Marotta Wealth Management, a fee-only financial planning and asset management firm in Charlottesville, Virginia. He is an oft-quoted writer and speaker on financial matters and his weekly financial column can be found at www.eMarotta.com
Host:What is a taxable account?
David John Marotta: A taxable account is an investment account, where you put the money in after you pay taxes on it. The investments will grow and when you take them out, you do not need to pay taxes. It acts more like a bank account. Any capital gains in the account, is taxed at capital gains tax rates, which are now currently 15%.
Taxable accounts are an important investment vehicle because when you retire, you may retire at age 65, you may not start collecting social security until age 72 and you may need to fund those years between when you retire and when you start collecting social security. You need a taxable account to do that. Taxable accounts can also be used to buy a home, buy a car and lot of other things that you might need to do. They will be your emergency fund, if you lose your job.
Additionally between 65 and 72, when you have no income, it is a great time to take your traditional IRA accounts and convert them to Roth IRA accounts and what is called the Roth IRA conversion. As you do that you take the money out of your IRA and you put it into your Roth IRA, but you have to pay income tax on it. So, you want to is in as lower tax bracket as possible. Well between 65 and 72, you may have no income, that is a perfect time to make income by converting all of your IRA accounts to Roth IRA accounts maybe at a little betty chair $50,000 so. That keeps you in a lower tax bracket. Then at age 72, you have all of your money or as much as possible, converted to Roth IRAs, you will never have to pay tax on that again.
When social security starts to come and you start having to pay tax on that. So, taxable savings is an important vehicle to be able to manage among the other two.