Investments and Strategies for Taxable Brokerage Accounts

I hold a pretty large portion of my wealth outside of tax sheltered accounts like an IRA or Roth IRA. This is partially by design and partially because my investing choices outperform mutual funds and ETFs I constrained to within these company retirement accounts.

Unfortunately, my choice of small cap investments and international stocks aren’t seen as safe investments and my company 401k disallows investing in individual stocks. So these investments are best left to taxable accounts.

Below I’ve gathered all of the investments that are better off left in taxable brokerage accounts. They can be broken down into a few different buckets as some are tax free investments while others will save you money on your taxes.

Individual International Dividend Stocks

International stocks can be a great asset to any investors portfolio. Most investors invest in an ETF or mutual fund and call it a day. The problem is whether your investing in an ETF, mutual fund or an individual stock that pays a dividend you have the potential for double taxation.

An example of this is dividend stocks in Japan.

When dividends are paid out in Japanese equities the government steps in and taxes these gains before they ever even enter your brokerage account.

The only way to get these taxes back is through the foreign tax credit and this credit can not be deducted from a tax-deferred account.

This is why I hold all of my international investments in a taxable account on Interactive Brokers.

Municipal Bonds

Municipal Bonds are a great nearly risk free way to invest your money. Even better is that they are tax free on the federal level.

This means that any interest received from these will not be taxed and would not benefit as greatly being in a tax-deferred account. However, there are a few other considerations that should be made:

  • If you live in a state with state income taxes then municipal bonds are not tax exempt.
  • Interest adds to your taxable income, so you need to keep this in mind as not to increase your tax bracket through this income avenue.
  • While you may save in taxes with municipal bonds they may not be the best investments available.

Younger investors likely won’t benefit from municipal bonds unless they offer higher interest rates. So its best to look for other investments for taxable accounts. If none other can be found, municipal bonds may be a great last resort.

MLPs Taxed in Sheltered Accounts

MLPs or Master Limited Partnerships are tax efficient investments by design. However, they are extremely complicated and will often require an accounted to get the most out of them.

The way MLPs are structured creates taxable income within tax deferred accounts. Since this is the case it doesn’t matter if you hold an MLP in a taxable or tax deferred account.

And since having the capital at your fingertips without any fees to obtain it from a tax deferred account its often better to hold these investments in a taxable account.

Deep Value Penny Stocks or OTC Stocks

The reason penny stocks and OTC stocks are best left to taxable accounts is mainly ease of access. Its very hard to invest in these stocks in retirement accounts. These stocks can produce incredible upside if you can find a deep value stock with high growth.

A lot of retirement accounts don’t allow for individual stock investing, let alone penny stocks. These typically include 401ks that company’s contribute to alongside your own contributions.

Your employer will usually partner with mutual fund brokerages and disallow you from investing in individual stocks which can be a bit annoying. On the bright side at least the 401k match is essentially free money.

Roth IRAs have a better track record of allowing individual stock investing and will even let you buy deep value penny stocks and sometimes have access to OTC markets.

Strategies for Taxable Brokerage Accounts

Not all of the benefits of a taxable account are from the type of investments you can make. There are many strategies and perks of being able to access your money whenever you want.

Tax Loss Harvesting

If you have investments that were unprofitable, taxable accounts allow the use of tax loss harvesting. This works best when you invest in individual stocks as you can pick and choose the investments you want to sell.

Tax loss harvesting offsets any gains you have made by deducting the losses from your gains. This is best used for shorter term investments as in short periods of time losses are inevitable.

Excess Liquidity

Retirement accounts have a major problem when it comes to liquidity. You can’t access your money without penalties or proving hardship.

This is why taxable accounts are best used when you want to access your money sometime before you retire. Personally I prefer taxable accounts because of this very reason. This along with the ability to access individual international deep value stocks makes it the best option.

Debt and Margin Loans

If you want to create a margin account you will likely need to skip the tax-deferred account. This account is only available to taxable accounts.

While Roth IRAs will allow you to invest in options as a form of margin it will not allow you to create a margin account.

Tax-deferred accounts also offer less options when it comes to debt. It’s true you can get a loan from these accounts for a home purchase or hardships, but you will still need to pay it back with interest.

Taxable brokerage accounts also offer securities backed lines of credit. This is a great way to offset taxes and provide some extra liquidity.

Bottom Line For Investing in Taxable Accounts

The most common advice is to max out your tax deferred accounts before even attempting to invest in a taxable account. This advice is great for most investors who are not as heavily involved in the day to day of their investments, but for more active investors its the wrong advice.

If you are investing in deep value stocks and even international stocks its best to keep your investments in taxable accounts. The benefits and freedom of choice in investments are far to great. Most retirement accounts just have too many rules for value investors to find great bargains.

Bryan Shealy

Bryan Shealy is an active value investor. He currently focuses on the small and micro cap stock market looking for bargains. He has written content for Seeking Alpha, Net Net Hunter and Broken Leg Investing.

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