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Selecting the right type of investment account may improve your after-tax investment returns. Most of the time, you will need to choose between taxable, tax-exempt, or tax-deferred account types. In many cases, it may be beneficial to have both taxable and non-taxable accounts.

What are the benefits of taxable and non-taxable accounts? Below is a brief description of a few available options. To better understand what’s best for your situation, consult your financial advisor.

A taxable account can be an individual or joint account. With a taxable account, you share the tax impact with the IRS. Capital gains and income are your tax liability – IRS gains. On the other hand, capital losses are your tax deductions – IRS losses. It may be prudent to hold growth stocks that don’t pay dividends in a taxable account. When you realize capital losses, you may be able to deduct them on your tax return.

Another benefit of taxable accounts is flexibility. There are no penalties for early withdrawals and no limits on deposits. Taxable accounts offer the most flexibility but tend to be less tax-efficient. All contributions are made with after-tax dollars, and you may be required to pay tax on realized capital gains and income each year.

Tax-advantaged accounts include 401(k) retirement plans, Traditional IRA, and Roth IRA accounts. These accounts are more tax-efficient and can potentially improve your long-term investment returns. However, they come with more restrictions.

If you work for a company that offers a 401(k) retirement plan, you have access to a tax-deferred account. A 401(k) allows your investments to grow tax-deferred, meaning you won’t pay taxes on capital gains or income while the money remains in the account. You can also contribute more to a 401(k) than to an Individual Retirement Account (IRA). All contributions are made pre-tax.

In 2025, you were allowed to contribute up to $23,500 to a 401(k). If you are age 50 or older, you could make an additional $7,500 catch-up contribution. Some employers offer a 401(k) match, where the employer matches your contributions based on a specific formula. This is essentially free money – an extra bonus for participating in the plan. To take full advantage, consider contributing at least enough to receive the full match so you’re not leaving money on the table. Keep in mind that 401(k) plans are designed for retirement, so early withdrawals may be subject to penalties and restrictions.

Individual Retirement Accounts (IRA) – Traditional and Roth are also tax-advantaged. If your tax rate doesn’t change over time, both Traditional and Roth IRAs can provide similar tax benefits.

With a Traditional IRA, contributions may be tax-deductible if your income is below IRS limits. Taxes are paid when you take distributions. In contrast, Roth IRA contributions are made with after-tax dollars, but qualified distributions are tax-free. All capital gains and income are non-taxable within both account types.

In 2025, you could contribute up to $7,000 or $8,000 if age 50 or older, to a Traditional IRA, Roth IRA, or a combination of both. The total combined contribution cannot exceed the applicable maximum. If you withdraw money from your IRA early, you may be subject to early withdrawal penalties.

Having both a taxable account and a tax-advantaged account is a smart strategy for beginner investors. A taxable account gives you maximum flexibility, while tax-advantaged accounts allow your money to grow more efficiently by reducing taxes—helping each dollar work harder for you and boosting long-term returns.

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