Wealthfront Explains Difference between Taxable and Tax-Advantaged Investment Accounts

California-based Fintech firm Wealthfront has explained how we can choose between taxable and “tax-advantaged” investment accounts.

Wealthfront notes that if you’re ready to begin investing, then you need to figure out what type of account you should be opening and maintaining. You can open up a taxable investment account or a tax-advantaged account, the company added.

The main difference between them is that tax-advantaged accounts come with “special” tax benefits. However, these benefits may come at a certain cost. Investors have to make a “tradeoff between tax benefits and flexibility,” Wealthfront explained.

The company also mentions in an extensive blog post that if you aren’t sure what you are saving for, then it may be a good idea to use a taxable investment account or “a mix of taxable and tax-deferred investment accounts.”

According to Wealthfront’s blog post:

“The beauty of taxable accounts is threefold: they are flexible, they come with lower fees than some tax-advantaged accounts (if you use a robo-advisor), and they allow you to benefit from tax-loss harvesting. Even if you’re sure you want to save for retirement, we don’t think a 401(k) is the best way to do it. For 401(k)s, we think you should only contribute what you need to in order to maximize employer match — these matching dollars are free money. Beyond that, you’re better off using an IRA (which is slightly more flexible and has lower fees) if you are allowed or, better yet, a taxable investment account.”

Wealthfront further notes that tax-advantaged accounts may sound great at first, however, it’s important to get a good understanding of the tradeoff between tax “benefits” and “flexibility.” Although it’s not always easy to put a dollar amount on the real value of flexibility, there’s “peace of mind that comes with knowing your savings are available to you for whatever purpose you choose and on your schedule,” Wealthfront noted.

The company adds that if you want to avoid the hassle of setting up and maintaining your new accounts, then you can invest with Wealthfront. This way, you don’t have to always worry about these processes.

Wealthfront claims that it takes only a few minutes to sign up and then your investment portfolio is “completely automated so you don’t have to do anything to maintain it.”

Wealthfront also mentioned:

“Whether you ultimately decide to open a taxable or tax-advantaged investment account (or both!), Wealthfront has the accounts you need to meet your financial goals. We offer Traditional, Roth, and SEP IRAs as well as 529 college savings accounts. We also offer a best-in-class taxable Investment Account with an industry-leading Tax-Loss Harvesting service that basically makes our service fee-free.” 

The company pointed out that for short-term goals (within 3 to 5 years), Wealthfront provides a high-interest Cash Account with a complete suite of checking features and “absolutely no account fees.”

(Note: for more information on these products check here.)

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