The Value of Personal Investment Accounts

A common refrain among financial advisors is to maximize annual contributions to your qualified retirement plan. Equally important, but often overlooked, is the need to fund a personal taxable investment account.

This type of account has several advantages. Unlike qualified retirement plans, which are highly restricted, you can move money in and out of a taxable account at will and without penalty. The most important advantage of a taxable investment account, however, is that the money is all yours.

Unfortunately, this is not true of a qualified retirement plan. The dirty little secret of these plans is that they are worth much less than you might think. When you withdraw funds from a qualified retirement account, it is taxed at your marginal income tax rate. A $1 million retirement account might only be worth about $600.000 after paying state and federal taxes. The federal government also dictates when you can begin taking the money out (after age 55), how much you can withdraw per year, and when you have no choice but to take the money out (after age 70 ½).

A $1 million taxable account, on the other hand, is worth exactly $1 million. You can withdraw the money any time, in any quantity, and it will not be taxed as income. Of course, there is no free lunch. You'll be taxed each year on the dividend and interest income generated by this account as well as on any net realized capital gains. But this is where Shearwater Capital can help. We specialize in strategies for minimizing your tax liability on taxable investment accounts.

Please don't think that we're arguing against funding your qualified retirement plan. On the contrary, you should take full advantage of this opportunity to invest pre-tax dollars with tax-deferred growth. (Another advantage of these plans is that they are generally protected from creditors.)

What we're suggesting is that you should not rely solely on your qualified retirement plan to secure a comfortable retirement. It is equally important to fund a taxable account to supplement your retirement savings and provide flexibility for other purchases along the way.

February 2003

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