ChooseFI Podcast Episode Summary: Deep Dive on Taxable Brokerage Accounts | Ep 549

Host: ChooseFI
Guests: Cody Garrett
Release Date: June 2, 2025
Duration: Approximately 52 minutes

Introduction

In this episode of ChooseFI, hosts Brad and Cody Garrett explore the taxable brokerage account, a frequently overlooked yet powerful tool on the path to Financial Independence (FI). Titled "Deep Dive: Taxable Brokerage Accounts," this episode delves into the intricacies, benefits, and strategic uses of taxable accounts, providing listeners with actionable insights to optimize their financial strategies.

What is a Taxable Brokerage Account?

Brad (00:00):

"Today on the show, we have our good friend Cody Garrett back again for another deep dive. This one is actually going to be on what we consider the most underappreciated account type, which is the taxable brokerage account."

Cody (01:19):

"The taxable brokerage account is something that's accessible to everybody—investing whether you have earned income, whether you're retired. Even minors can invest in these types of accounts."

Definition:
A taxable brokerage account is a non-retirement investment account where all earnings—such as interest, dividends, and capital gains—are taxed in the year they are earned, regardless of whether the earnings are withdrawn or reinvested.

Brad (03:19):

"This is your regular savings. You could decide to put that money into a taxable brokerage account where it's taxed along the way."

Benefits of Taxable Brokerage Accounts

1. Unlimited Contributions

Cody (07:56):

"When you run out of options to contribute to those accounts that are limited in your contributions, the taxable accounts are next. There are no annual contribution limits."

Key Points:

• Unlike retirement accounts (401ks, IRAs), taxable accounts have no contribution caps.
• Flexibility to invest large sums without restrictions.
• Suitable for high earners who have maximized other tax-advantaged accounts.

2. Investment Availability

Cody (09:10):

"You can invest in individual securities, individual stocks and bonds, ETFs, exchange-traded funds. Yes, you can continue investing in mutual funds."

Benefits:

• Broader range of investment options compared to retirement accounts.
• Access to alternative investments like real estate, REITs, and cryptocurrencies.
• Greater flexibility in portfolio diversification.

3. Preferential Tax Treatment

Cody (11:15):

"The IRS has provided favorable tax treatment for investing in certain types of ways within these accounts."

Highlights:

• Qualified Dividends: Taxed at lower rates (0%, 15%, or 20%) depending on taxable income.
• Long-Term Capital Gains: Similarly taxed at preferential rates compared to ordinary income.
• Example (13:41): Long-term capital gains can be taxed at 0% for single filers with an income up to ~$60,000 and married couples filing jointly up to ~$120,000.

Brad (15:17):

"Even for most people, you're only paying 15% on long-term cap gains. That's incredibly preferential compared to ordinary income rates."

4. Tax Loss Harvesting

Cody (19:47):

"Selling something at a loss can offset other capital gains and up to $3,000 of ordinary income annually."

Strategies:

• Specific Share Identification: Choose which tax lots to sell to maximize losses or gains.
• Tax Loss Harvesting: Selling securities at a loss to offset gains elsewhere in the portfolio.
• Avoiding Wash Sale Rule: Transitioning between similar but not "substantially identical" securities (e.g., VOO to VTI) to maintain market exposure while realizing losses.

Brad (21:08):

"With a taxable brokerage account, you can realize losses without being out of the market."

5. Asset Location Priority

Cody (28:37):

"Hold U.S. stocks in taxable accounts for preferential tax treatment, rather than higher-income yielding assets like REITs or bonds."

Asset Allocation Recommendations:

1. U.S. Stocks: High percentage of qualified dividends, low yields.
2. Foreign Stocks: Moderate qualified dividends, higher yields with potential for foreign tax credits.
3. Real Estate (REITs): High yields, mostly non-qualified dividends.
4. Government Bonds: Tax-exempt at state level, fully taxed federally.
5. Corporate Bonds: Interest taxed as ordinary income, least favorable.

Brad (29:21):

"If you're saving for short-term goals like buying a house, prioritize liquidity and flexibility with taxable accounts."

6. Tax-Free Withdrawals

Cody (30:50):

"Withdrawals from taxable accounts are tax-free, akin to taking money out of a bank."

Key Points:

• No Tax on Withdrawals: Unlike traditional retirement accounts, taking funds out doesn't trigger taxes.
• Example: Money moved to cash within the account can be withdrawn without additional tax implications.

7. No Age-Based Rules

Cody (32:00):

"Never forced to take required minimum distributions (RMDs) or face penalties for early withdrawals."

Advantages:

• Flexibility in Usage: Withdraw funds at any age without penalties.
• Estate Planning: No RMDs, allowing assets to grow indefinitely.

8. Gifting and Estate Planning

Cody (34:40):

"Gift appreciated securities directly to others or charitable organizations without triggering capital gains taxes."

Strategies:

• Gifting to Individuals: Transfer securities to beneficiaries with carryover cost basis, potentially utilizing lower tax brackets of recipients.
• Charitable Donations: Donate appreciated securities to charities to avoid capital gains taxes and receive a charitable deduction.
• Step-Up in Basis: Inherited taxable accounts receive a cost basis reset to the fair market value at the date of death, minimizing taxes for beneficiaries.

Brad (38:39):

"Donating appreciated securities allows you to give more to charity and pay less to the IRS."

Practical Strategies and Considerations

Specific Share Identification

Cody (18:00):

"Use specific share identification to choose exactly which lots you want to sell."

Tips:

• Granular Control: Select specific lots to optimize tax outcomes.
• Tool Utilization: Platforms like Fidelity and Vanguard offer options to specify disposal methods.

Tax Loss Harvesting Strategies

Cody (19:46):

"Sell securities at a loss to offset gains and reduce taxable income."

Example:

Selling VOO at a loss and immediately purchasing VTI to stay invested while realizing the loss.

Asset Location Prioritization

Cody (28:37):

"Prioritize holding U.S. stocks in taxable accounts for their favorable tax treatment."

Guidance:

• Maximize Tax Efficiency: Allocate higher-taxed investments to tax-advantaged accounts.
• Balance Diversification and Tax Optimization: Ensure investment diversification before optimizing for taxes.

Order of Operations for Tax-Optimized Accumulation

Cody (45:44):

"When contributing, start with workplace retirement accounts, then ESPP, HSAs, max out 401ks, Roth IRAs, and finally taxable brokerage accounts."

Suggested Order:

1. Employer-Sponsored Retirement Accounts: Contribute enough to receive employer match.
2. Employee Stock Purchase Plans (ESPP): Leverage stock discounts and potential growth.
3. Health Savings Accounts (HSA): Utilize tax-free growth for medical expenses.
4. Max Out 401ks/403bs/457s: Further tax-advantaged contributions.
5. Roth IRAs: Benefit from tax-free growth and withdrawals.
6. Mega Backdoor Roth: Additional after-tax contributions if available.
7. Taxable Brokerage Accounts: Invest remaining savings for flexibility and tax treatment.

Brad (48:52):

"For most in the FI community, having assets in a taxable brokerage account is essential."

Gifting and Estate Planning

Cody (35:05):

"If you give more than $19,000 per person annually, you need to file a gift tax return, but the lifetime exclusion is generous."

Key Points:

• Gift Tax Rules: Annual exclusion of $19,000 per donor per recipient (2025 figures).
• Estate Tax Benefits: Step-up in basis minimizes tax for beneficiaries.
• Charitable Giving: Donate appreciated securities to maximize tax benefits for both donor and charity.

Cody (37:33):

"Giving appreciated securities directly to charity allows you to avoid realized capital gains."

Asset Titling and Estate Considerations

Cody (40:12):

"Taxable accounts can be jointly titled or have beneficiaries, simplifying estate planning."

Options:

• Joint Tenancy with Right of Survivorship (JTWROS): Common for spouses.
• Payable on Death (POD)/Transfer on Death (TOD): Direct transfer to beneficiaries without probate.
• Custodial Accounts (UGMA/UTMA): For gifting to minors, though limited in flexibility.

Brad (42:32):

"Understanding how to title accounts appropriately can simplify estate planning and ensure seamless transfers."

Prominent Quotes

• Brad (00:58):

  "You're often trying to optimize for taxes and do everything right, fill up certain buckets... but we often miss this really incredible account type."

• Brad (06:08):

  "Let's stop the belly aching with the tax. If you still have money left over and you're saving, life is pretty darn good."

• Cody (07:56):

  "There are no annual contribution limits. You could contribute like, hopefully, you're in a place someday where you can contribute a million dollars to your taxable brokerage account annually."

• Brad (15:17):

  "Even for most people, you're only paying 15% on long-term cap gains. So even if you're not paying 0, 15% is still incredibly preferential as compared to ordinary income rates."

• Brad (29:21):

  "Don't let the tax tail wag the dog. Don't make decisions based on tax alone."

• Cody (50:42):

  "If you're able to put money into those compelling three, you're probably tracking to a great retirement moving forward wholeheartedly."

Conclusion

This episode underscores the importance of taxable brokerage accounts in a comprehensive FI strategy. Despite their taxation on earnings, these accounts offer unparalleled flexibility, investment options, and strategic tax benefits that can significantly accelerate the journey to Financial Independence. By understanding and leveraging taxable accounts alongside tax-advantaged vehicles, listeners can optimize their portfolios for both growth and tax efficiency.

Additional Resources:

• Upcoming Book: Tax Planning to and Through Early Retirement by Cody Garrett and Sean Mulaney. Measure Twice Money
• ChooseFI Local Groups: choosefi.com/local
• Financial Independence 101 Course: choosefi.com/fi101
• Subscribe to Newsletter: choosefi.com

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