{"id":562,"date":"2021-09-27T12:00:00","date_gmt":"2021-09-27T12:00:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/when-a-taxable-brokerage-account-almost-beats-a-roth-ira\/"},"modified":"2026-05-26T22:52:22","modified_gmt":"2026-05-26T22:52:22","slug":"when-a-taxable-brokerage-account-almost-beats-a-roth-ira","status":"publish","type":"post","link":"https:\/\/moneywithkatie.com\/when-a-taxable-brokerage-account-almost-beats-a-roth-ira\/","title":{"rendered":"Taxable Investing Account vs. Roth IRA: Evaluating the Right Vehicle for Your Strategy [2026]"},"content":{"rendered":"<div class=\"sqs-html-content\" data-sqsp-text-block-content=\"\">\n<h5><i><span style=\"font-weight: 400;\">Thanks to Betterment for sponsoring this deep dive into the intricacies of the taxable Investing account vs. the Roth IRA.\u00a0<\/span><\/i><\/h5>\n<h5><i><span style=\"font-weight: 400;\">Paid client. Views may not be representative. See <\/span><\/i><a href=\"https:\/\/apps.apple.com\/us\/app\/betterment-invest-save-money\/id393156562\"><i><span style=\"font-weight: 400;\">App Store<\/span><\/i><\/a><i><span style=\"font-weight: 400;\"> &amp; <\/span><\/i><a href=\"https:\/\/play.google.com\/store\/apps\/details?id=com.betterment&amp;hl=en_US&amp;gl=US\"><i><span style=\"font-weight: 400;\">Google Play<\/span><\/i><\/a><i><span style=\"font-weight: 400;\"> reviews. <\/span><\/i><a href=\"https:\/\/www.betterment.com\/influencer\/money-with-katie?utm_source=mwk&amp;utm_content=promoter\"><i><span style=\"font-weight: 400;\">Learn more<\/span><\/i><\/a><i><span style=\"font-weight: 400;\">. Investing involves risk. Performance not guaranteed.<\/span><\/i><\/h5>\n<p>&nbsp;<\/p>\n<p><b>Here\u2019s the bottom line up front (BLUF?): <\/b><span style=\"font-weight: 400;\">If you (and your spouse, if applicable) wouldn\u2019t be withdrawing <\/span><i><span style=\"font-weight: 400;\">more than the upper bound of the 0% capital gains tax rate in retirement<\/span><\/i><span style=\"font-weight: 400;\">, there may functionally be little difference between the Roth IRA and the taxable Investing account at the time of withdrawal.<\/span><span style=\"font-weight: 400;\"><br \/><\/span><\/p>\n<h5><span style=\"font-weight: 400;\">(<\/span><span style=\"font-weight: 400;\">IRA contributions are limited to earned income and subject to contribution limits. Betterment does not provide tax advice.)<\/span><\/h5>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Merely typing that sentence felt blasphemous, but if you\u2019ve read <\/span><a href=\"https:\/\/moneywithkatie.com\/rich-girl-nation\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">Chapter 6 of <\/span><i><span style=\"font-weight: 400;\">Rich Girl Nation<\/span><\/i><\/a><span style=\"font-weight: 400;\">, you know a critical part of my investment strategy involves being strategic about tax-advantaged investment vehicles such that you could reach your magic number approximately 13% faster.* (*<\/span><i><span style=\"font-weight: 400;\">Citation<\/span><\/i><span style=\"font-weight: 400;\">: Me and my special math, which is going to have to be a Just Trust Me Bro moment until you reach the appendix of this post, where I\u2019ll include a picture of the graph.)<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Because retirement (early or otherwise) in the United States is effectively the thing you invest to reach your entire working life and then use that money to pay yourself \u201ca salary\u201d later, navigating the taxes you pay on that income can make a meaningful difference in outcomes.\u00a0<\/span><\/p>\n<p><b>TL;DR<\/b><span style=\"font-weight: 400;\">: Withdrawals from your different accounts are taxed differently:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Withdrawals from your pre-tax accounts like your Traditional 401(k) will be taxed as if it\u2019s qualified income (though, no payroll taxes, so you\u2019ll keep your 7.65%).<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Distributions from your Roth IRA and other Roth accounts may be tax free, if IRS requirements are met.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">And finally, gains realized in your taxable Investing accounts will be taxed in their own special tax bracket, the <\/span><i><span style=\"font-weight: 400;\">capital gains tax bracket<\/span><\/i><span style=\"font-weight: 400;\">, which reflects our country\u2019s love affair with its capital class.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The entire premise privileges tax-advantaged accounts, which might make you think I\u2019m less enthused about taxable Investing accounts. Not so. In fact, the strategy wouldn\u2019t work without that <\/span><b>long-term capital gains tax rate<\/b><span style=\"font-weight: 400;\">\u2014because your capital gains can be taxed very favorably.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">How favorably? Let me show you:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Up to $98,900 of qualified investment income can potentially be taxed at a 0% federal rate, a meaningful advantage when compared to ordinary earned wages, where an equivalent amount would subject a married couple to federal income and FICA taxes.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">When you leverage the standard deduction ($16,100 for single filers and $32,200 for married couples filing jointly), the upper limit to qualify for the 0% long-term capital gains tax threshold expands even further. Taken together, individual scenarios may allow for the following thresholds:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Single filers<\/b><span style=\"font-weight: 400;\"> could realize up to <\/span><b>$65,550<\/b><span style=\"font-weight: 400;\"> in income qualifying for the 0% capital gains rate when factoring in the standard deduction\u2014the mathematical equivalent of a <\/span><b>$5,462<\/b><span style=\"font-weight: 400;\"> monthly budget.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Married couples filing jointly<\/b><span style=\"font-weight: 400;\"> could realize up to a combined <\/span><b>$131,100<\/b><span style=\"font-weight: 400;\">, which is enough to support monthly expenses of <\/span><b>$10,925<\/b><span style=\"font-weight: 400;\"> under the 0% rate bracket.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">If you can save and invest your way there in your pre-tax, Roth, and taxable accounts (this may be enough to generate tax-free income\u2014if IRS conditions are met\u2014 of ~ $1.7 million for the single filer and ~$3.3 million for the married couple, using a 4% rule), you can generate tax-free income, provided there are no major changes to the tax code.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">So you\u2019re probably like, \u201cGreat, this isn\u2019t news, Katie\u2014we all read your dumb book and we\u2019ve been over the fact that we can use our taxable Investing accounts to create $98,900 in tax-free capital gains income! What does the Roth IRA have to do with any of this?\u201d<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Instances where a taxable Investing account competes with a Roth IRA<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">One of the benefits of becoming financially independent is embracing flexibility and freeing yourself from a life that costs a lot of money. If you\u2019re someone (or rather, a couple) who can live on $98,900 per year or less, I\u2019d argue that the taxable Investing account makes<\/span><i><span style=\"font-weight: 400;\"> almost as much sense<\/span><\/i><span style=\"font-weight: 400;\"> as a Roth IRA in most circumstances, and more sense in others.\u00a0<\/span><\/p>\n<p><b>A key feature a Roth IRA offers is the potential for qualified, tax-free distributions if IRS requirements are met<\/b><span style=\"font-weight: 400;\">. If $98,900 in a given year isn\u2019t enough (say you need to withdraw a much larger chunk to buy a home, or otherwise access a lot more of the money at once), Roth IRAs provide a highly compelling strategy from a tax perspective.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But here\u2019s the headline: If you (and your spouse, if applicable) wouldn\u2019t be withdrawing <\/span><i><span style=\"font-weight: 400;\">more than those amounts annually anyway<\/span><\/i><span style=\"font-weight: 400;\">, then the tax impact at the time of withdrawal can look remarkably similar between a Roth IRA and a taxable Investing account. Both can potentially carry the benefit of a 0% federal tax rate. The taxable Investing account simply has an upper limit for that specific bracket.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">What about the tax-advantaged growth along the way in the Roth IRA?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">As you likely know by now if you\u2019ve been hanging around my corner of the internet long enough, a possible downside to a taxable Investing account is that you generally have to pay taxes on your dividend income every year, even if you choose to automatically reinvest it. If you\u2019re just buying and holding index funds or index fund ETFs in your taxable Investing account and never selling (selling = realizing capital gains), you wouldn\u2019t be taxed on your unrealized capital gains annually\u2014but the dividends are a different story.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Let\u2019s pretend your taxable Investing account contains one ETF: VTI, the Vanguard Total Stock Market ETF.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Assume that VTI has paid a dividend yield around 2% per year (give or take a few basis points).<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If your taxable Investing account has, say, $1M in it, you\u2019re going to get an approximate 2% dividend yield each year worth $20,000.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">That\u2019s a fantastic tiny violin problem to have (there\u2019s really no world except for tax planning in which $20,000 of dividend income is considered \u201ca problem\u201d), but along the way, you\u2019re going to be paying taxes on that dividend yield every year.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In that sense, it\u2019s a race against the clock\u2014you may want as few tax seasons as possible to pass between when you (a) start working toward your FI number in your taxable Investing account and (b) when your earned income drops and you begin living on that income. Once your earned income drops and you begin withdrawing your capital gains, your qualified dividend income could potentially become absorbed in that 0% bracket.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Assuming the dividends are qualified, they\u2019d be subject to the same favorable capital gains tax rates as realized gains (0% up to $49,450 single\/$98,900 married and 15% thereafter).<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The amount of income tax you\u2019ll pay on your dividends during your working life and accumulation phase depends on how much money you make, but most people end up paying 15% on them annually. This may not be a big deal when your account is small. For example, if a taxable Investing account with $50,000 worth of VTI earns an approximate 2% dividend, you\u2019re paying 15% on $1,000 (about $150). But 15% of $20,000 (approximate 2% dividend yield on $1M) is $3,000.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">That would mean\u2014leading up to your drawdown of this account\u2014your dividend yield would take a 15% haircut each year that you otherwise wouldn\u2019t be subjected to within a Roth IRA, and that\u2019s not nothing. If you increase the value of this account by $50,000 per year (starting with $100,000 and taking 19 years to reach $1M), you\u2019d pay an estimated total of $31,350 in dividend taxes over 19 years assuming consistent tax rates and yields.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">We can probably assume those tax payments represent opportunity cost. Even if we aren\u2019t withdrawing the money from the account to pay the dividend tax, the income that we use to <\/span><i><span style=\"font-weight: 400;\">pay the taxes <\/span><\/i><span style=\"font-weight: 400;\">can no longer be invested. If you assume the average annualized dividend tax over that period ($1,650**) had been invested every year and gotten an average of 8% returns, we\u2019d be looking at around $75,000 in opportunity cost.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">**<\/span><i><span style=\"font-weight: 400;\">$31,350 over 19 years is an average of $1,650 per year, though in reality, your payments would start small and grow larger over time, not be perfectly uniform.<\/span><\/i><\/p>\n<p><span style=\"font-weight: 400;\">Over a normal working life of 30 or 40 years, the dividend taxes may add up. The earlier the \u201cretirement,\u201d the lower the opportunity cost of decades of dividend tax payments that a Roth IRA strategy is designed to help reduce.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">The flexibility of the taxable Investing account is incredibly valuable<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">In order to produce income in early retirement, a taxable account can be an essential tool, because the contribution limits for the Roth IRA mean it can take a significantly longer time to accumulate enough to live on in an account with contribution limits.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">And while some people have access to Mega Backdoor Roth IRAs (these enable you to contribute tens of thousands of after-tax dollars to your Roth IRA through some specific 401(k) footwork), <\/span><b>I\u2019m arguing that the qualified dividend tax burden could be a worthwhile trade-off if it means access to your money before 59.5.<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Because while you can access your Roth contributions early, you can\u2019t access the growth without potential penalties\u2014and since your Roth dollars are tax-free, <\/span><b>you may want to use them last to give them more time to grow<\/b><span style=\"font-weight: 400;\">. It\u2019s safe to assume that money you put in your Roth IRA will truly be the last money you ever spend, if you ever get to it (some people find that their taxable accounts and 401(k)s grow large enough that they never even need their Roth IRAs).<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The point is, overfunding the Roth IRA (especially in the \u201cmega backdoor\u201d situation) can result in <\/span><b>underfunding<\/b><span style=\"font-weight: 400;\"> the taxable Investing account, which, thanks to the long-term capital gains tax rate, can function with similar tax efficiency in retirement so long as your total income across all sources is lower than <\/span><b>$65,550<\/b><span style=\"font-weight: 400;\"> (single) or <\/span><b>$131,100<\/b><span style=\"font-weight: 400;\"> (married filing jointly).<\/span><\/p>\n<p><span style=\"font-weight: 400;\">You can think of the dividend tax like a fee for using your \u201cno rules\u201d investment account.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Interested in opening a taxable Investing account?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">I recommend Betterment. Betterment offers taxable Investing accounts with a diverse mix of equity and bond ETFs, selected for you depending on your investing goal and the way you answer a few questions about your age and timeline.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Betterment\u2019s automated investing accounts are about as flexible as it comes: There are no contribution or income limits, and Betterment can provide guidance to help you understand the tax impact of any withdrawals you make. The algorithm that constructs your index ETF portfolio is guided by the analysis of Betterment\u2019s team of investing experts who work to help maximize potential returns, reduce your tax burden, and automatically rebalance and reinvest on your behalf.\u00a0<\/span><\/p>\n<p><a href=\"https:\/\/www.betterment.com\/investing?utm_campaign=2026-investing&amp;utm_medium=influencer&amp;utm_source=mwk&amp;utm_content=blog\" target=\"_blank\" rel=\"noopener\"><b>Get started in minutes.<\/b><\/a><\/p>\n<p><em><b>Appendix<\/b><\/em><\/p>\n<p><span style=\"font-weight: 400;\">As promised, here\u2019s the \u201cInvest in a Traditional 401(k), then invest the tax savings elsewhere\u201d chart from <\/span><i><span style=\"font-weight: 400;\">Rich Girl Nation<\/span><\/i><span style=\"font-weight: 400;\">, which sadly will be fossilized with 2025 contribution limits and tax data:<\/span><\/p>\n<\/div>\n\n\n<figure class=\"wp-block-image size-full is-resized\"><img loading=\"lazy\" decoding=\"async\" width=\"511\" height=\"723\" src=\"https:\/\/moneywithkatie.com\/wp-content\/uploads\/2021\/09\/Screenshot-2026-05-26-at-2.54.52-PM.png\" alt=\"\" class=\"wp-image-2723\" style=\"width:539px;height:auto\" srcset=\"https:\/\/moneywithkatie.com\/wp-content\/uploads\/2021\/09\/Screenshot-2026-05-26-at-2.54.52-PM.png 511w, https:\/\/moneywithkatie.com\/wp-content\/uploads\/2021\/09\/Screenshot-2026-05-26-at-2.54.52-PM-212x300.png 212w\" sizes=\"(max-width: 511px) 100vw, 511px\" \/><\/figure>\n\n\n\n<p><\/p>\n\n\n\n<p>The 7% return is a hypothetical assumption provided for illustrative purposes only and does not represent the performance of any specific investment. Actual returns will vary, and investments can lose value.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Thanks to Betterment for sponsoring this deep dive into the intricacies of the taxable Investing account vs. the Roth IRA.\u00a0 Paid client. Views may not be representative. See App Store &amp; Google Play reviews. Learn more. Investing involves risk. Performance not guaranteed. &nbsp; Here\u2019s the bottom line up front (BLUF?): If you (and your spouse, [&hellip;]<\/p>\n","protected":false},"author":178814,"featured_media":2391,"comment_status":"closed","ping_status":"open","sticky":false,"template":"si-template-single-post-taxable-investing.php","format":"standard","meta":{"footnotes":""},"categories":[37,35],"tags":[44,64],"class_list":["post-562","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-independence","category-investing-and-taxes","tag-taxable-investing","tag-popular-taxable-investing"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.8 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Taxable Investing Account vs. Roth IRA: Evaluating the Right Vehicle for Your Strategy [2026] - Money with Katie<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/moneywithkatie.com\/when-a-taxable-brokerage-account-almost-beats-a-roth-ira\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Taxable Investing Account vs. Roth IRA: Evaluating the Right Vehicle for Your Strategy [2026] - Money with Katie\" \/>\n<meta property=\"og:description\" content=\"Thanks to Betterment for sponsoring this deep dive into the intricacies of the taxable Investing account vs. the Roth IRA.\u00a0 Paid client. 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