The Missed Opportunity in Taxable Investing

You have 30 years before retirement. How are you saving for financial challenges and opportunities 5-10 years away?

I'm Kit Lancaster, your friendly CFP and Financial Planner from the vibrant city of Chicago, IL. I specialize in providing tailored financial advice to professional households with incomes ranging from $200,000 to $500,000. Today, I want to shine a light on an often-overlooked tool in wealth-building: taxable investing—and why it’s a game-changer for your financial strategy.

The Missed Opportunity in Taxable Investing

For most of us, retirement savings get all the attention. And while contributing to tax-advantaged accounts like 401(k)s and IRAs is critical for long-term security, what about the milestones you’ll reach before retirement? Whether it’s funding your children’s college education, buying a lake house, taking an epic family vacation, or handling an unexpected health expense, taxable investment accounts offer the flexibility you need to achieve mid-term goals without compromising your future.

Exploring the Benefits of Taxable Investing

Taxable investment accounts may not have the immediate tax benefits of retirement accounts, but they offer incredible advantages, including:

1. Liquidity and Flexibility

Unlike retirement accounts, taxable accounts have no penalties for withdrawals before age 59½. This means you can access your funds to cover unexpected expenses or seize opportunities, like starting a business, without worrying about early withdrawal penalties.

2. Long-Term Capital Gains Favorability

When you hold investments for over a year, they qualify for long-term capital gains tax rates, which are often lower than short-term rates. This can reduce your tax burden and encourage disciplined, long-term investing.

3. Tax-Loss Harvesting

Taxable accounts allow for tax-loss harvesting, where you sell underperforming investments at a loss to offset gains elsewhere in your portfolio. This strategy can significantly reduce your tax liability while keeping your asset allocation intact.

4. Diversification Beyond Retirement Accounts

Taxable accounts let you invest in a broader range of options, including individual stocks, bonds, mutual funds, and ETFs. This flexibility helps you diversify your portfolio, balancing risk and return in a way that aligns with your goals.

5. Estate Planning Benefits

Taxable accounts are also useful in estate planning. Assets in these accounts can receive a step-up in basis upon transfer to your heirs, reducing potential capital gains taxes and preserving more wealth for future generations.

The Power of a Securities-Backed Line of Credit (SBLOC)

A securities-backed line of credit (SBLOC) is a lesser-known, but powerful, feature of taxable investment accounts. It allows you to borrow against the value of your portfolio, typically at rates much lower than traditional loans or credit cards.

Why is this valuable? An SBLOC provides a flexible, low-cost way to fund significant expenses—such as home repairs, college tuition, or even an emergency—without needing to sell investments and trigger capital gains taxes.
Real-life example: Let’s say you need $50,000 for a home renovation. Instead of liquidating assets and paying taxes on the gains, you can secure a loan against your portfolio, keep your investments intact, and continue benefiting from market growth.

A Tale of Two Households

Let’s compare two hypothetical households, both earning $300,000 annually:

Household 1 contributes 10% of their income ($30,000/year) to a retirement account.
Household 2 does the same but also saves an additional 4% ($12,000/year) in a taxable account.

After 10 years, assuming a 7% annual return (tax-free for retirement accounts) and a 5.95% net return for taxable accounts (adjusted for taxes), here’s how their investments would look:

Scenario	Retirement Account Balance	Taxable Account Balance	Total Balance
Only Retirement Accounts	$443,507.98	$0.00	$443,507.98
Retirement + Taxable Accounts	$443,507.98	$167,187.65	$610,695.63

Mid-Term Challenges You Could Face

Here’s a glimpse of the real-world challenges and opportunities these households might encounter:

Household Repairs and Capital Projects
- Roof replacement: $20,000
- Energy-efficient windows: $15,000
- New car: $35,000
Education
- College tuition: $80,000 for four years at a public university
Health Expenses
- Unplanned medical costs: $10,000/year for two years = $20,000
Lost Income
- A six-month job loss or career transition: $100,000

Household 1 may need to rely on high-interest loans or withdraw from retirement savings early, triggering penalties and taxes. Household 2, however, can dip into their taxable investment account or leverage an SBLOC to meet these challenges head-on—without disrupting their retirement savings.

Conclusion

Taxable investing is more than just another account; it’s a strategic tool for achieving financial flexibility and funding life’s milestones. With benefits like liquidity, favorable tax treatment, diversification, and access to an SBLOC, taxable accounts can be a powerful addition to your financial plan.

If you’re ready to take your investing strategy to the next level, let’s chat! Together, we’ll build a plan that supports your goals today, tomorrow, and into retirement.

Disclosure: This article is for informational purposes only and does not constitute personalized investment advice or recommendations. Tax rates and laws may vary and are subject to change. Consult a financial advisor or tax professional for guidance tailored to your situation.