While tax-advantaged retirement accounts, like 401(k)s and IRAs, are the most common way Americans own stocks, it’s possible—and even advisable—to choose taxable investment accounts for some of your financial goals. While taxable investment accounts aren’t right for every situation, but they could be a good fit for some of your investing dollars.

What Is a Taxable Investment Account?

First, a refresher: A taxable investment account lets you buy and sell investments like stocks, bonds, exchange traded funds (ETFs) and index funds. You can open one at an online broker, with your financial advisor or with a robo-advisor and then deposit cash in the account to purchase securities.

The word “taxable” in the name simply means that any increase in value or income you see from your investments is taxed during the tax year you experience them. This might happen if you sold a stock at a gain or if you received dividend payments. Depending on how long you’ve held an investment, stock gains might be taxed at your normal income tax rate or a lower long-term capital gains tax rate. Dividends generally qualify for the latter regardless of how long you’ve held them.

Tax-advantaged retirement accounts, on the other hand, do not have the same tax requirements. As long as money is held in your account, you won’t owe taxes on any gains or income you see. (That said, you do often end up paying taxes when you make withdrawals in retirement.) Unlike taxable accounts, however, you can’t just contribute to retirement accounts endlessly. Retirement accounts are subject to annual contribution limits and, in the case of Roth IRAs, limits on the amount of income you can earn to contribute.

When Should You Invest with a Taxable Investment Account?

With all of the tax advantages of retirement accounts, it’s easy to see why they’re often people’s go-to investment accounts, especially when they’re investing for the long term. And if you haven’t started saving for retirement already, you should make sure you’re setting at least something aside in your workplace 401(k) or an individual retirement account (IRA) before you consider putting money into a taxable investment account.
But after you’ve checked those boxes, here are a few scenarios where a taxable account would make sense.

Benefit from Additional Liquidity

Liquidity is the top reason an investor might pursue a taxable investment account, says Dwain Phelps, founder and CEO of Phelps Financial Group. “There are no age restrictions on when money can be accessed with taxable accounts, unlike retirement plans such as 401(k)s, annuities and traditional IRAs, in which you have to wait until you are 59 ½” or owe applicable taxes plus a 10% penalty, he says. “In general, taxable investments can be accessed by investors anytime with no age restrictions.”

This makes taxable investment accounts ideal for mid- and long-term goals that are at least a few years down the road.

Save More for Retirement

“If you’ve already maxed out your non-taxable account contributions like your 401(k) or IRA and you have additional funds to invest, taxable investment accounts can make perfect sense,” says Stefanie Lewis, regional wealth planning manager for Wells Fargo Private Bank.

And if you’re concerned about the taxes associated with retirement savings outside of a tax-advantaged account, you’ve got options: “If minimizing tax is a goal within your taxable account, you can always invest in tax-exempt bonds or tax-managed funds,” says Lewis.

Avoid RMDs in Retirement

If you’re worried about required minimum distributions, or the mandatory minimum withdrawals the government requires of all but Roth IRAs once you reach a certain age, then a taxable account can allow you to keep your money invested for a longer period.

“Under the current law with pre-tax dollars, investors must start taking distributions by age 72,” says Phelps. “Investors are not under any obligation to ever take a distribution from a taxable investment.”

Achieve Greater College Savings Flexibility

If you’re saving for education in a 529 plan or a Coverdell account, you’re only allowed to use funds for “qualified educational expenses.” If you want to pay for anything your student needs that isn’t considered “qualified,” a taxable investment account can give your savings a boost and provide increased flexibility.

In fact, complementing a 529 with a taxable brokerage account can be an ideal tax move: Your 529 account covers all qualified educational expenses, letting your taxable investment proceeds pay for expenses like room and board over the summer when school isn’t in session, travel to and from home or abroad, and even incidental expenses throughout the school year.

Have Broader Investment Options

A taxable investment account broadens horizons for investors who want the ultimate control in the investments they hold and the investment strategies they pursue.

“A taxable account opens up options for more adventurous investors, for example, those who want to more easily invest in cryptocurrency or do options trading,” says Lewis. “Bitcoin investment in retirement accounts is very limited. Additionally, some brokerages limit complex options strategies in your retirement account.”

Maximize an Inheritance

Because you are now required to clean out inherited retirement accounts within 10 years of receiving them, traditional IRAs and 401(k)s with untaxed dollars can create unexpected tax burdens for recipients.

In these instances, it might make more sense to spend assets in retirement accounts up while you’re still alive and then will taxable accounts that don’t have clocks on their withdrawal schedule. What’s more, “investments in a taxable account qualify for the tax-free stepped up basis when you pass away,” Lewis says. “So even though the account is taxable when you pass away under current law, all of the built-in gains [or those gains seen before you inherit the account] become tax-free.”

Think about the benefits if you have a relative who bought shares in Amazon in 1997 when it was valued at $1.73 per share. In an inherited taxable account, thanks to stepped up basis, you’d inherit all the gains between that purchase price and today’s price in the $3,000 per share range tax-fee and only owe capital gains on any increases seen after you receive the account.

How to Open a Taxable Investment Account

If you feel a taxable investment account is a fit for your savings goals, opening one is easy.

1. Decide where to open your account, either through your financial advisor or with an online brokerage.
2. Fund your account so you have cash available to make your investments. You can link an existing bank account to make adding cash easy.
3. Research investments and make selections based on how long you’ll be investing for, how much risk you want to take on and what your savings goals are.
4. Make your purchase.
5. Don’t forget to rebalance your portfolio and adjust your investment strategy as you approach meeting your goals.

You may choose to open more than one taxable investment account if you’re saving for multiple goals. A multiple account strategy can be helpful, especially if you have short- and long-term goals.

The Bottom Line on Taxable Investment Accounts

Taxable investment accounts can offer more flexibility and greater liquidity for investors beyond tax-advantaged savings vehicles common in retirement and educational savings.

As with any investment, it’s wise to sit down with a financial advisor and even a tax professional to discuss your goals and review any tax implications for investments you hold outside your tax-advantaged accounts.