Ask a CFP® – Foundational Questions Edition: What’s a Taxable Brokerage Account?
If you’ve been following along in our Account Types Series during the first few weeks, you might have found yourself wondering things like:
“Wait, there’s a limit to how much I can invest in my IRA and 401(k) each year? Can I invest more?”
“I want full access to all of my funds at all times without any early withdrawal penalties…is there a different option?”
“Can’t I just invest in a “regular” investment account?”
The answer is: Yes, you can.
And this week, we’re going to explore exactly how with a type of account that often gets overlooked in the retirement planning conversation: the taxable brokerage account (also called a non-qualified account).
Retirement accounts like IRAs, Roth IRAs, and 401(k)s come with rules.
They generally require you to have earned income and limit how much you can contribute each year. As we’ve discussed in earlier posts, these accounts are also designed to be long-term in nature—most of the time, you can’t withdraw funds before age 59½ without facing penalties (with some exceptions).
These rules exist for good reason, and the benefits, like potential tax deductions, tax-deferred growth, and employer matching, make them powerful tools for retirement planning.
But they’re not always the right fit for everyone. The contribution limits, access restrictions, or eligibility requirements can make them unavailable, or sometimes less ideal, for certain goals or stages of life. In fact, even if you are eligible to contribute to a retirement account, a taxable brokerage account may be more appropriate depending on your unique goals, timeline, and overall strategy.
Taxable Brokerage Account Features to Know
A taxable brokerage account is one of the most flexible tools available to investors. Here are some important features to be aware of:
No contribution limits.
You can contribute as much as you want, whenever you want. There are no annual limits like there are with IRAs or 401(k)s.It’s a container, not an investment.
Just like an IRA or 401(k), a taxable brokerage account is simply an account that holds your investments—it’s not an investment in and of itself.Wide investment options.
Within a brokerage account, you can choose from a broad range of investments, including:ETFs (Exchange-Traded Funds)
Mutual funds
Individual stocks
Individual bonds
CDs
Money market funds
This flexibility makes it a great option for many different goals, whether that’s long-term investing, building liquidity, or saving for a shorter-term milestone.
How do my investments get taxed?
So far, a taxable brokerage account might sound a lot like an IRA/Roth IRA/401(k) just without the contribution limits. But here’s where the real difference shows up: how and when your investments are taxed.
With Traditional and Roth IRAs & 401(k)s the timing of taxation is all based on when funds are going into and coming out of the accounts themselves. What happens inside the account (dividends, interest, and capital gains) doesn’t trigger taxes along the way.
For example, at a high level the goal with Traditional accounts is to reduce taxable income when you contribute to the account, but then increase taxable income when you distribute from the account. With Roth accounts, there’s no reduction in taxable income when you contribute, but the goal is that qualified distributions will be tax-free.
In short: tax events only occur at the entry and exit points of the account for Traditional and Roth accounts.
Tax Timing: Brokerage Accounts Work Differently
With a brokerage account, it’s the opposite. Contributions and distributions from the account itself do not trigger any tax impact. Instead, what happens inside the account can create tax consequences, even if you never withdraw a penny.
Here are the most common ways brokerage accounts do trigger tax impacts:
Interest and Dividends:
Any interest or dividends earned by your investments are counted as income in the year you receive them—regardless of whether you reinvest or keep the cash.Capital Gains (Profits from Sales):
If you sell an investment that’s gone up in value, the difference between your purchase price and sale price is a capital gain, and it’s counted as income in the year you sell.Capital Losses (Selling at a Loss):
If you sell an investment for less than you paid, you may be able to use the loss to offset capital gains or deduct it against income (within limits).
Let’s look at a few quick examples:
Example #1:
George has a brokerage account and inside that account he has $10,000 invested in the ABC fund. The ABC fund pays an annual dividend of $250 that gets deposited in George’s account. George doesn’t need the money right now, so he buys another $250 worth of the ABC fund. The funds never left the brokerage account, but that doesn’t matter and the $250 dividend that George received will count as income for him this year.Example #2:
Emily also has a brokerage account and inside her account she has $10,000 worth of XYZ fund. Originally, a year ago, she put $10,000 into the account and purchased this XYZ fund but unfortunately, the fund hasn’t increased in value since then. She needs $10,000 for a home project so she decides to sell her XYZ fund. In this case, she purchased the investment for $10,000 and is now selling the investment for $10,000 and transferring the proceeds to her bank account. No gain has occurred so there will be no tax impact. Even though she’s taking funds out of the account.
Hopefully these examples highlight the difference in how funds are taxed within a brokerage account. While George didn’t take funds out, he ultimately ends up having taxable income as opposed to Emily who did take funds out and won’t have taxable income. Understanding the tax picture is important of course, but it’s also important to note that George still came out ahead in this scenario, even though he paid taxes.
Why might you use a taxable brokerage account?
Reason #1: Potentially Preferential Tax Treatment
While taxable brokerage accounts don’t provide a tax deduction for contributions or tax-free income on distributions (at least not always…more on that in a minute), these accounts can still offer tax advantages in the form of preferential tax treatment for certain types of investment income.
What investment income qualifies for preferential tax treatment?
Qualified Dividends – Typically paid by U.S.-based corporations or international corporations based in a country that has a tax treaty with the U.S. You must own the stock or fund for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Most often, qualified dividends are paid by U.S. stocks or stock funds (like ETFs), but can also be paid by international stock funds.
Long-Term Capital Gains – Occur when you sell a holding that has increased in value more than 1 year after you purchased it. Could apply to stocks, bonds, real estate, ETFs, mutual funds, etc.
What is the “preferential tax treatment”?
While ordinary federal income tax rates range from 0% to 37%, qualified dividends and long-term capital gains fall into their own special brackets— 0%, 15%, or 20% (plus a possible 3.8% Net Investment Income Tax for higher earners).
To find the rate that applies, first all ordinary income (think non preferential income like wages, interest, self-employment income, rental income, etc.) is added up. Then, the preferential tax treatment investment income is added on top of that. For a married couple filing jointly in 2025, here’s how the brackets look:
Preferential tax treatment investment income applied between $0 and $96,700 = 0%
Preferential tax treatment investment income applied between $96,701 and $600,050 = 15%
Preferential tax treatment investment income applied above $600,050 = 20%
Remember, ordinary income fills the brackets first (but still gets taxed at normal ordinary income tax rates), and then preferential income stacks on top. For example, if a married couple has $95,000 of ordinary taxable income (e.g., wages) and $5,000 of qualified dividends, the ordinary income fills up most of the 0% bracket for qualified investment income. That leaves only $1,700 of room, so the first $1,700 of dividends are taxed at 0%, and the remaining $3,300 spill into the 15% bracket.
In comparison, non-qualified investment income in this same scenario would fall into the 12% and 22% tax brackets as ordinary income (as opposed to 0% and 15% brackets for qualified investment income).
Tax Disadvantages:
Even with preferential rates, investment income in a taxable brokerage account doesn’t escape taxation altogether. Qualified dividends and long-term capital gains can still be taxed at rates as high as 23.8% (once the Net Investment Income Tax applies), which means your account may experience a degree of ongoing “tax drag” each year.
By contrast, retirement accounts like Traditional and Roth IRAs avoid this annual tax drag issue altogether. Growth inside those accounts is either tax-deferred (Traditional) or tax-free (Roth), so you don’t have to think about annual tax consequences of interest, dividends, and capital gains along the way.
The good news? There are ways to make a taxable brokerage account more tax-efficient. Some common strategies include:
Asset Location Strategies – Placing investments that are more likely to qualify for preferential tax treatment (such as U.S. stock ETFs) or those that generate little to no taxable income (e.g., dividends and interest) in your brokerage account. Meanwhile, investments like bonds that may generate more taxable income each year, might be better suited for an IRA or 401(k).
Capital Gain Harvesting – In years when your taxable income is low enough, you may be able to realize (sell) long-term gains at a federal tax rate of 0%. You could even repurchase the investment immediately after selling, which resets your cost basis to a higher level without triggering tax.
Capital Loss Harvesting – The goal of course is that investments will increase in value, but as part of a diversified investment strategy there will often be a few holdings that have gone down in value instead. When investments decline, you can sell at a loss and use that realized loss to offset current or future gains, or up to $3,000 per year of ordinary income. Just be mindful of the wash-sale rule: you can’t buy back the same (or a “substantially identical”) investment within 30 days before or after the sale in any account you or your spouse owns. Instead, you could look for a similar—but not identical—holding that still fits your portfolio’s goals.
As with any tax strategy, it’s wise to consult your tax advisor before taking action. And keep perspective: tax efficiency is just one piece of a bigger financial puzzle. Your investment plan should drive your tax strategy, not the other way around. Or, as the saying goes: don’t let the tax tail wag the dog.
Reason #2: Liquidity
Retirement accounts like IRAs and 401(k)s are powerful savings tools, and in certain cases they do allow limited access to funds before retirement (see our earlier posts on IRAs and 401(k)s for details). But those exceptions often come with strings attached—penalties, restrictions, or narrow qualifying circumstances. That’s where a taxable brokerage account can play an important role.
With a brokerage account, your money is accessible at any time without early withdrawal penalties. This flexibility makes it a useful complement to retirement accounts, especially if you:
Are saving for a short- or intermediate-term goal like a home down payment or college costs.
Want to create a pool of investments you can tap if you retire early and need income before age 59½.
Simply value the peace of mind that comes with knowing you have additional liquidity beyond your emergency cash reserves.
In short, taxable brokerage accounts provide the freedom to invest for the future while still keeping your money within reach.
Reason #3: Flexibility
As we covered in our earlier posts on IRAs and 401(k)s, those accounts come with contribution limits and sometimes income restrictions that can reduce—or even eliminate—your ability to put money in.
A taxable brokerage account doesn’t have those barriers. You can invest as much as you want, whenever you want, and you can sell or withdraw at any time (keeping in mind that your investments will still go up and down in value over time).
This makes a brokerage account especially useful if you’ve:
Maxed out your retirement accounts and want to save even more.
Experienced a change in circumstances—a new job, a raise, or a shift in financial goals—and need a place to put extra savings to work.
Simply want the freedom to contribute and withdraw without limits or restrictions.
In short, taxable brokerage accounts can adapt to your goals and your stage of life, giving you a level of flexibility that retirement accounts can’t always match.
Reason #4: A Bonus Estate Planning Benefit – Stepped-Up Cost Basis
In addition to the preferential tax treatment for qualified dividends and long-term capital gains during your lifetime, under current tax law, taxable brokerage accounts also offer a unique estate planning advantage: the step-up in cost basis.
When the account owner passes away, the cost basis of securities in a taxable brokerage account is “stepped up,” usually to their fair market value on the date of death. This step-up can significantly reduce, or even eliminate, the capital gains tax liability for heirs.
Here’s an example:
Frank purchased shares of the XYZ Fund for $10 each, 10 years ago.
The value of those shares has since increased to $20 each, meaning Frank had $10 of unrealized gain per share.
Unfortunately, Frank passes away and leaves the shares to his daughter, Claire.
Claire decides to sell the shares right away at $20 each. Her cost basis has been stepped up to $20, so she realizes $0 of taxable gains.
In contrast, if Frank had sold the shares before his death, he would have realized $10 of capital gains per share and owed tax on that amount.
This feature can make taxable brokerage accounts an efficient way to pass wealth to the next generation, since it often allows heirs to liquidate assets without being burdened by large built-in capital gains.
Final Thoughts
Whether you’re looking for liquidity, flexibility, or an additional place to store investments beyond your normal retirement accounts, taxable brokerage accounts can be a powerful tool in your overall financial plan.
TL;DR Recap
No contribution or income limits - invest as much as you want, whenever you want.
Liquidity - access funds anytime without early withdrawal penalties.
Flexibility - wide range of investment options, adaptable to short-, medium-, or long-term goals.
Tax treatment - dividends, interest, and realized gains are taxable each year, but qualified dividends and long-term gains often receive preferential rates (0%, 15%, 20%).
Potential disadvantages - ongoing “tax drag” from annual taxation, unlike tax-deferred or tax-free accounts.
Ways to improve tax-efficiency - asset location, gain harvesting, loss harvesting (watch wash-sale rules).
Estate planning bonus - heirs may benefit from a step-up in cost basis, often eliminating built-in capital gains at inheritance.
Bottom line: A taxable brokerage account is the most flexible “regular” investment account. It won’t replace retirement accounts, but it can complement them, giving you additional investing power, liquidity, and planning opportunities.
Looking Ahead
So far in our Account Types Series, we’ve covered IRAs, 401(k)s, the difference between Traditional and Roth accounts, and now taxable brokerage accounts. Next week, we’ll put it all together with an example of how these different account types can work side by side in a retirement plan.
If you have a question you’ve always wanted to ask, basic or otherwise, send it to us at ask@sandersretirement.com. We’d love to feature it in an upcoming post.
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