Taxable Account

A taxable account is an arrangement that allows an investor to deposit funds and buy and sell investments. A Mainstar Trust taxable account provides the option to explore alternative investments along with more traditional assets including stocks, bonds and mutual funds.

There is no tax incentive available at the time funds are deposited in a taxable account, but the purchase price creates a basis that will not be taxed when the asset is distributed or sold. Some taxable accounts generate annual taxable income (e.g., interest on savings accounts or certificates of deposit, mutual fund dividends or distributions). For investments such as mutual funds, stocks, and other property, the increase in value above the initial purchase price will be taxable in the year the asset is sold and may qualify for lower capital gains tax rates if the asset has been held for more than one year.

This contrasts with traditional Individual Retirement Account (IRA) and pre-tax retirement accounts, in which savers receive tax deductions in the year dollars are contributed and generally delay taxation on earnings that are credited each year. Both the amount of the original contribution and investment earnings or gains will be taxable as ordinary income when the assets are withdrawn from the account.

Mainstar offers taxable and nontaxable accounts so our clients can work with one custodian and service team for their IRA accounts and nonretirement accounts.

 Taxable accounts provide flexibility and tax diversification for investors. There are no annual limits as to how much individuals can save in taxable accounts and they do not have to wait until retirement to access these accounts. Individuals saving in an IRA or other nontaxable retirement account must meet certain requirements to be eligible to contribute. For example, an investor must have earned income to contribute to an IRA and may only contribute up to the annual limit ($6,000 for 2019, $7,000 if age 50 or older).

Retirement accounts are also subject to certain distribution restrictions, while taxable account assets can be accessed at any time. An IRA owner or retirement plan participant will be subject to a 10% early distribution tax if assets are withdrawn before age 59½ (unless an exception applies). This tax does not apply to taxable accounts.

To establish a health savings account, you must sign an HSA plan agreement with an HSA custodian. Trust companies, banks, life insurance companies and other financial institutions like Mainstar Trust can act as an HSA custodian. The HSA custodian will provide you with a copy of the HSA custodial agreement that explains the health savings account rules. 

Taxable accounts are used to save for both short-term needs and long-term retirement accumulation. Investors with a short investment horizon may choose a taxable account because there are no IRS withdrawal restrictions or early distribution penalties for withdrawing before age 59½. For long-term savings, investors use a combination of taxable and nontaxable accounts to diversify their sources of retirement income. Because taxable accounts are funded with after-tax dollars, the amount used to purchase the assets and any earnings paid to the accounts create a tax-free stream of income. When investments such as stocks and real estate are sold, only the gains (the difference between the purchase price and the sale price) will be taxable and will often be taxed at lower capital gains rates. Retirement savings, on the other hand, if funded with deductible contributions are taxable as ordinary income when withdrawn – both contributions and earnings. This combination of tax treatment between the two types of accounts allows an individual to take distributions that are both taxable and nontaxable during retirement to help control the amount of taxable income they have each year.

Another feature of taxable accounts that is attractive for long-term savings is these accounts are not subject to the age 70½ required minimum distribution (RMD) rules. Because taxable account owners are not forced to deplete a portion of their accounts each year, they can let the assets grow to fund future needs and build assets for heirs.

Unlike retirement accounts which must be individual accounts, a taxable account can be owned by one individual or owned jointly. Joint accounts will have rights of survivorship (JTWROS). In this type of ownership, the account assets will be owned by the surviving individuals upon the death of one of the joint account holders.

As custodian of your taxable account, Mainstar Trust will provide you with a quarterly electronic statement that provides information on the investments and transactions within your account. For tax reporting and payment purposes, Mainstar will provide you and the IRS with a form reporting taxable activity. Some common reporting forms include:

• Form 1099-INT, Interest Income – reports interest earned on investment vehicles such as savings accounts, certificates of deposit, and money market accounts
• Form 1099-DIV, Dividends and Distributions – reports a variety of dividends and total capital gains earned on various types of investments (e.g., mutual funds); this includes dividends that are reinvested within the account, qualified dividends (qualify for reduced capital gains tax treatment), total long-term capital gains distributions, and non-dividend distributions from the investment
• Form 1099-B, Proceeds From Broker and Barter Exchange Transactions – reports gains or losses on the sales of certain securities, generally publicly held securities
• Form 1099-OID, Original Issue Discount – reports when a bond is purchased at less than face value and the redemption price or face value is higher than the issue price (e.g., treasury bills)
 

You will receive these IRS reporting forms by February 15  of the year following the year of the reported investment activity. You may be required to include the taxable interest as ordinary income on your tax return, according to the IRS instructions for each type of investment income.

You can deposit cash to your taxable account, or you can transfer cash or assets from another taxable account. Be sure to confirm that the receiving custodian agrees to accept the type of assets you want to transfer. You can use Mainstar Trust’s Taxable Custodial Account Transfer Request form to ensure all of your transfer instructions are communicated to both Mainstar Trust and the sending custodian. If transferring assets in kind (i.e., without liquidating first), a copy of a recent account statement with cost basis and purchase date is required. Because of the complex tax issues associated with certain types of investments, you may want to seek investment and/or tax advice prior to the purchase, transfer, or sale of investments.