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By Christine Benz and Jason Stipp | 05-07-2015 02:00 PM

6 Mistakes to Avoid With Taxable Accounts

Taxable accounts can play a key role for investors, so long as they are careful about what investments they put in and how they sequence withdrawals.

Jason Stipp: I'm Jason Stipp for Morningstar. We all know the importance of 401(k)s, IRAs, and other types of retirement accounts, but your taxable accounts can also play a big role in retirement planning. Here to talk about some mistakes that folks should avoid with their taxable accounts is Christine Benz, our director of personal finance.

Christine, thanks for joining me.

Christine Benz: Jason, great to be here.

Stipp: Taxable accounts can play a role--a very important one. You have six things that you should avoid doing with taxable accounts. The first one is not have them at all, just writing them off.

Benz: Right. People automatically go to their company retirement plans or their IRAs to invest in, but it is important to put some money inside of taxable accounts. For one thing, if you need money prior to retirement, those are liquid assets that you can tap without penalties or taxes, so that's an advantage. The other thing is, for very high-income folks--say, someone earning over $250,000 a year--that combined $23,500 that people can put in IRAs and 401(k)s if they are under age 50, that's not even 10% of their income. So, they will need to put additional monies aside to make sure that they have enough money in retirement.

Finally, the last reason that people should consider investing inside of a taxable account is that tax diversification in retirement is a really valuable thing. So, ideally, you'll come into retirement and you'll have some tax-deferred assets--money that you've stashed in your company retirement plan that you'll pay taxes on upon withdrawal. You maybe will also have some Roth IRA assets, which are tax-free during retirement. And then those taxable assets are advantageous and, arguably, a little better for you than the tax-deferred assets in retirement because you'll only pay capital gains on your distributions; you won't owe taxes on the entire kitty. So, that's another key reason that most people should consider saving inside of a taxable account instead of the other types of wrappers.

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