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3 Ways a Brokerage Can Help Your Retirement Savings

By U.S. News & World Report

A brokerage account is the most flexible type of investment account. While there are no tax advantages, investors also have complete freedom to make contributions and take withdrawals without restrictions or penalties.

Using a brokerage account as part of your overall retirement saving strategy can provide a few key benefits including the potential to retire early, leave a tax-efficient legacy to your heirs, and the potential to reduce your tax liability in retirement.

Get closer to an early retirement. If you’re already maxing out contributions to an employer-sponsored retirement plan like a 401(k), you may think you’re already doing everything you can to save for retirement. However, if cash flow permits, it may make sense to consider regular contributions to a brokerage account. The strategy is fairly simple: investors have two options for their surplus cash flow: save it or spend it. As income increases, spending typically follows unless a conscious effort is made to put a meaningful portion toward savings.

[See: 10 Costs You Can Eliminate in Retirement.]

One of the benefits of automatic contributions to a retirement plan at work is that investors don’t have to make a bi-weekly decision as to whether they rather spend the funds on lifestyle expenses or save for retirement. By starting a brokerage account and setting up automatic contributions, you can effectively create the same “set it and forget it” mentality. Over time, with regular savings and investments, you’ll likely be in a much better state for retirement, and could possibly contemplate an earlier retirement or more resources for your desired lifestyle.

Using a brokerage account to systematically save and invest surplus cash flows can also help prevent investors from keeping too much cash on hand in a very low-yielding savings account. In fact, after account for inflation, cash will actually yield a negative return.

Keep in mind that you shouldn’t keep your emergency reserves or funds to cover any short-term needs in a brokerage account.

A brokerage account may also be able to help spendthrift individuals manage their finances. While the funds in a brokerage account are accessible at any time, it isn’t quite as easy as making an electronic transfer from your savings account. You will need to sell securities in order to raise cash and there will be capital gains tax if the position has appreciated.

Leave a tax-efficient legacy to your heirs. If one of your goals is to preserve wealth to leave as a legacy to your loved ones, assets held in a taxable account can be a great vehicle.

For tax purposes, the difference between your cost basis in an investment and the sale price will determine what portion of the gain will be subject to capital gains taxes after it is subsequently sold. When an individual holds highly appreciated securities, there can be a significant tax liability when the position is ultimately liquidated as the spread between the cost basis and the sale price is so large, assuming there are no offsetting losses to recognize.

However, the tax basis rules change when a beneficiary inherits a taxable brokerage account. Taxable assets can pass to a beneficiary on a “stepped-up” cost basis, which values the investment on the date of your death instead of your cost basis in the asset, which is typically much lower, especially if the asset was held for a long time.

Investments receiving step-up treatment will also be considered long-term investments regardless of the actual holding period, and taxed at more favorable long-term capital gains rates when sold. Beneficiaries will not receive a step-up in basis for inherited assets held in tax-deferred retirement accounts like a 401(k), 403(b), or a traditional IRA. Further, your heirs will need to pay ordinary income tax on the entire amount when funds are withdrawn.

[See: 8 Things That Matter More Than Money for a Happy Retirement.]

Regularly funding a brokerage account can help you achieve your legacy goals in three key ways.

First, you can choose to draw down assets in tax-deferred retirement accounts first, preserving the funds in your brokerage account to pass onto heirs so they will receive the favorable tax treatment. Second, unlike inherited assets held in retirement accounts, brokerage accounts do not have any required minimum distributions or other rules governing when distributions can (or must) be made and for what purpose. Brokerage accounts maintain the same flexibility even after they are passed down. And finally, through a dedicated approach to making regular contributions to the brokerage account over the years, the legacy you ultimately pass on is likely to be much more impactful than if the funds were spent or kept in cash.

Tax-efficient withdrawal strategies in retirement. Having a meaningful portion of your net worth held in a taxable brokerage account will help retirees regain some control over their tax liability in retirement. Recall that assets held in tax-deferred accounts, where most Americans have the vast majority of their retirement savings, will be taxed as ordinary income when funds are withdrawn.

Holding a sizeable portion of your portfolio in tax-diversified accounts may open up planning opportunities. But first a quick review of how withdrawals from taxable and tax-free accounts are treated.

Dividends in a brokerage account are taxed as ordinary income when they are received, but when you liquidate assets in a brokerage account you have the ability to target positions that will receive more favorable long-term capital gains rates. If you have a Roth IRA, those assets can be liquidated tax-free, assuming you’ve met the required five-year holding period.

Planning opportunities may be available in retirement as your situation changes. For example, in years where you are in a lower marginal tax bracket, you may wish to draw funds from tax-deferred retirement accounts as they represent the biggest potential tax liability. If you have income needs while you are still working or are in a higher marginal tax bracket in a given year, it may be advantageous to tap a Roth account or your brokerage account.

Developing a strategy for saving and investment and sticking with it over the long term can have a profound impact on an investor’s life. A brokerage account allows individuals to gain exposure to the broad-based stock market while maintaining the flexibility they need to use the funds as they wish and as their needs change. Further, if you are charitably inclined, you may even choose to donate highly appreciated securities to charity later in life. You may receive a tax deduction while supporting a cause you truly care about.

[See: The Best ETFs Retirees Can Buy.]

Brokerage accounts are the only type of investment account that can provide complete flexibility for your goals, lifestyle, and to adapt as your needs change in the future.

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3 Ways a Brokerage Can Help Your Retirement Savings originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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