Is It Time to Open a Brokerage Account for Your Investments?

March 12, 2023

Is there a good reason to contribute to a brokerage account? In this highlight, we discuss when it makes sense to contribute to a brokerage account.

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Jammin has a question. Is there a good reason to contribute to a brokerage account? For some context, I’m 39, I have my six-month emergency fund, and I’m putting $2,500 a month in retirement. I have a total of $800k in retirement, and a fourth of that is a Roth 457b, which I max out annually. So, when does this brokerage account make sense? Does it ever make sense? What do you guys think?

When he talks about a brokerage account, he is referring to the third bucket, which is not the tax-deferred stuff, such as IRAs and 401ks and the 427s, nor the tax-free stuff like the Roths and the HSAs. He is talking specifically about the after-tax pocket. The question is when that makes sense, or if it ever makes sense. The third bucket provides flexibility, which is why it is so great. None of us know what the future holds. We have this idea that we will save a percentage of our income so that we can be financially independent in the future. However, we don’t know what will happen. What if I start saving and my income increases? What if I was planning on retiring at 65 but now want to retire at 50? If I had that third after-tax bucket, it would be the money that would bridge me from age 50 to 59 and a half so that I can retire early.

What if you find yourself in this position: “I’ve been building up and I’ve got this off, but I’ve got this great business idea, or I really want to invest in this business that a colleague of mine is starting, and they’ve asked for a capital commitment. I really believe in what they’re doing, and I want to have a part of that and participate in that.” If all you have is the Roth dollars and pre-tax dollars, it’s hard to get that liquidity to be able to go do that. There are just two examples of how having that third bucket can be unbelievably valuable in terms of allowing you to pursue your ultimate financial goals.

The Financial Order of Operations is essential. Everyone should sprint to get to Step seven as fast as possible because steps one through six are a financial foundation. If you want to get loaded, you have to get to step seven as fast as possible. It comes in two folds. Bo hit on one: flexibility. I’ll call it margin and the fact that you get to own your time sooner once you start loading up that after-tax brokerage account because it is going to give you flexibility because the government lets you have access to that money anytime. A lot of the financial foundation steps one through six are tax-favored. However, because they’re so tax-favored, the government put some strings on when you can get them.

As soon as you get to step seven, you can either retire sooner, or you can have more liquid money. Step seven is where you have easy access to fork-in-the-road moments. You can go to step eight, which loads you up to start spending more. This is the stage where you can buy a nicer car, travel better, and so on. However, it’s going to start messing with your brain because there’s another option, another road, the “get rich” road. This is where you can buy an asset. Usually, somebody has to be willing to sell you an asset for a reason, but this is the stage where you can buy low and sell high.

I always tell people that they need cash because it’s what’s going to make them rich. When everybody else is panicking and fearful, you don’t want to be running all cash while you’re going through steps one through six of the Financial Order of Operations. Doing so would mean that you’d miss out on a lot of opportunity. However, there’s nothing wrong with being a little extra frothy once you get to steps seven and eight so that you can take advantage of opportunities. Warren Buffett made over 10 billion dollars in 2008 just off of giving loans and then getting specialized shares because everybody was out of cash, and he was able to do it. We were able to buy this building because everybody else was scared, and again, it creates margin and opportunity.

We love after-tax brokerage accounts because even if you’re just loading them up with index funds and other things, it’s still very easy to get access to them. They’re a great wealth-building tool.



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