If you have a tax-advantaged account like a Roth IRA, why would you want to invest in stocks in a non tax-advantaged account like say Robinhood, or E-Trade, etc.? Would the tax-advantaged account be better by default?

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    I would note that Robinhood and E-Trade are brokers, not account types (E-Trade offers both retirement and non-retirement accounts)
    – D Stanley
    Oct 6, 2020 at 22:24
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    You realize those tax accounts all have contribution limits, right?
    – Brady Gilg
    Oct 6, 2020 at 22:47
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    For many people, a non-retirement account can be tax-advantaged. If you have low enough income, and you have long-term capital gains, you pay 0% Federal taxes on those gains. forbes.com/advisor/investing/capital-gains-tax
    – FlanMan
    Oct 8, 2020 at 1:55

3 Answers 3


Some thoughts:

  • There's a limit to how much you can put in a tax-advantaged account. Even with mega back-door and other ways to move money around, there's still limits into how much you can contribute
  • There are income limits that reduce or even prevent your ability to use some tax-advantaged accounts
  • Retirement accounts are designed for retirement. If you want income off of your investments now, it's better to do it outside of retirement accounts that will charge you a penalty for early withdrawal
  • Many 401(k) plans (which are the best retirement plan option for many people) have a very limited selection of investments.
  • Loss/Gain harvesting - you can use opportunistic capital loss/gain harvesting in high/low tax periods. With a retirement account you only pay tax when you withdraw funds.
  • Minimum distributions - when you hit a certain age, you are required to withdraw funds from traditional retirement accounts - this money must go somewhere, so a non-tax-advantaged account may be a good option that still has discretionary funds to invest.
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    "now" or any time between now and 59.5 or so. There are ways to get money out of retirement accounts early, but they can be cumbersome and expensive.
    – stannius
    Oct 7, 2020 at 15:12
  • Touting loss harvesting as an advantage of investing outside tax-advantaged accounts is a bit misleading. Loss harvesting defers taxes some taxes by lowering the cost basis of your investments. But investing in a tax advantaged account defers all the taxes.
    – Phil Frost
    Oct 8, 2020 at 12:33
  • @PhilFrost Thats true - but I was thinking more of opportunistic loss harvesting. You could harvest losses in high-tax-rate years and gains in low-tax-rate years. With a retirement account you pay whatever tax rate you're at when you withdraw. Granted it's not a huge difference, just part of the thought experiment.
    – D Stanley
    Oct 8, 2020 at 13:07
  • @DStanley that makes sense -- maybe it would be more complete to say generally that you have more control over when taxes are paid, which might mean realizing losses or gains.
    – Phil Frost
    Oct 8, 2020 at 15:17
  • You have certain limit in Roth IRA contribution and it will not be sufficient to manage your retirement, with the Roth IRA growth alone. You have to save and invest as much as possible. There are people who save 70% of their income and invest.

  • For every investment liquidity is a major factor. The invested money should be available to you in case you need it. Roth IRA locks the money.

To answer your second question, tax advantaged vs tax non-advantaged: If they both offer same returns, then definitely tax-advantaged is better than non-tax advantaged. So, you need to see, if you have got limited money to invest, tax-advantaged by default offers more benefits compared to tax non-advantaged.

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    Though to be fair, the principle can be withdrawn from a Roth at any time without penalty, so it is nearly as liquid as an ordinary account.
    – Phil Frost
    Oct 8, 2020 at 15:20

It mostly comes down to when you want to be able to use the invested money and whether you're hitting the (relatively low) contribution limits.

The tax-advantaged accounts can only be used for retirement unless you want to pay a fortune to the IRS in penalties (which would, of course, defeat the purpose of using a tax-advantaged account, since you'd end up paying more tax rather than less.) Thus, if you want to have funds available before you retire, then you'd want to put them in a normal investment account rather than a tax advantaged retirement account.

For most people, it's really best to have both. The retirement accounts are clearly better for money you want to save until retirement, but it's best to also have separate investment accounts to use for funds you might want to access before retirement. Whether it's saving up for some particular purchase (such as a vehicle, major home renovation project, etc.) or just having an emergency fund around in case something comes up where you need the funds, there are lots of reasons that people want to invest money in such a manner that it's accessible prior to retirement. Non-tax-advantaged investment accounts are one of the best ways to do that, as they will typically generate much higher returns over time than things like bonds or money market accounts (or, especially, bank savings or checking accounts.)

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