Non-Retirement Investments for Your Portfolio

Once you are contributing to retirement accounts, you may also want a place to invest money for goals that come before retirement or after you reach annual contribution limits. Non-retirement investments can provide that flexibility, but they do not all receive the same tax treatment or carry the same level of risk. A taxable brokerage account, 529 plan, real estate investment, government security or certificate of deposit (CD) can serve a different purpose depending on when you expect to need the money.

If you’re not sure what the right asset allocation should be, consider working with a financial advisor who can help create the right investment strategy to help you reach your financial goals.

Non-Retirement Investments

Non-retirement investing generally refers to holding assets outside accounts specifically designed for retirement, such as a 401(k) or IRA. One advantage is that these investments are not subject to the retirement account rules that can restrict contributions and certain withdrawals. The tax treatment depends on the investment and account.

For example, investments held in a taxable brokerage account can generate taxable dividends, interest and capital gains. Selling an investment for more than its adjusted basis generally produces a capital gain, while eligible investment losses can offset gains and potentially reduce other income within federal limits.

The appropriate investment can also depend heavily on your timeline. Money you expect to spend in two or three years generally calls for greater attention to preserving principal than money intended for a goal several decades away. Taking more investment risk does not necessarily make sense simply because you plan to use the money sooner.

Five of the most common types of non-retirement investments are:

1. Brokerage Accounts

A brokerage account is perhaps the most obvious choice among non-retirement investment accounts. These accounts generally do not provide the upfront federal tax advantages associated with traditional retirement accounts, but they offer considerable flexibility. There is no retirement-age requirement for taking money out and investors can generally buy and sell securities according to the brokerage firm’s rules. Common investments include stocks, bonds, exchange-traded funds (ETFs) and mutual funds.

There are many ways to open a brokerage account today. For example, there are online brokerages with low fees and there are full-service brokerages that may have higher fees in exchange for more extensive customer service. Another way to open a brokerage account is with a robo-advisor. These services use algorithms to automate investments, meaning investors can put them on autopilot after completing the initial setup. Some automated investment services also offer tax-loss harvesting, which involves realizing investment losses that may be used to offset capital gains, subject to federal tax rules.

2. Education Plans

Education accounts such as 529 savings plans receive tax treatment that differs from an ordinary taxable investment account. Contributions are not deductible on a federal income tax return, although some states provide their own tax benefits. Investment earnings can grow without current federal income tax and distributions are generally federally tax-free when used for qualified education expenses.

529 funds can cover more than traditional college tuition when federal requirements are met. Qualified uses can include certain higher education expenses and up to $10,000 in lifetime student loan repayments for a beneficiary, with a separate $10,000 limit applying to each of the beneficiary’s siblings. Federal law also permits certain 529 assets to be transferred directly to the beneficiary’s Roth IRA. These rollovers are subject to several requirements, including a $35,000 lifetime limit, the annual Roth IRA contribution limit, a 15-year account-age requirement and restrictions involving contributions made during the preceding five years.

Taking money out for expenses that do not qualify can cause the earnings portion of the distribution to become taxable and an additional 10% federal tax can apply unless an exception is available.

3. Real Estate

Blocks with arrows pointing to a bull's eye.

Real estate is not always the most passive investment, especially when it comes to your home, or homes purchased as rental properties. There are real estate investment options available even if you don’t want to be a landlord though. Two popular choices today are real estate investment trusts (REITs) and real estate crowdfunding.

REITs can be purchased directly in a brokerage account, but for many real estate crowdfunding investments, you invest through a platform or specific offering. Availability, minimum investments, liquidity and investor eligibility can vary. Private real estate offerings can also be considerably less liquid than publicly traded REITs, so investors should review how and when they can exit before committing money.

4. Government Bonds

U.S. government securities include marketable Treasury bills, notes and bonds as well as savings bonds such as Series I bonds. Marketable Treasury securities can be purchased through TreasuryDirect and can also be held through financial institutions or brokers. Treasury bills have shorter maturities, notes cover intermediate terms and Treasury bonds have longer maturities.

Series I savings bonds work differently from marketable Treasury securities. Their interest rate combines a fixed component with an inflation-based component, with new rates announced twice each year. Electronic I bonds can generally be purchased in amounts up to $10,000 per person each calendar year. They cannot be redeemed during the first 12 months and redeeming them before five years results in the loss of the previous three months of interest.

Treasury securities and savings bonds can be useful when preserving capital and generating interest are higher priorities than pursuing stock-market growth. Their prices, liquidity and interest-rate exposure still differ by security, so “government bond” does not describe a single investment profile.

5. Certificates of Deposit (CDs)

Certificates of deposit (CDs) are deposit accounts that typically pay interest in exchange for keeping money deposited for a specified period. Banks and credit unions can offer terms ranging from months to several years and withdrawing money before maturity can trigger an early withdrawal penalty depending on the account agreement. Interest on CDs is generally taxable for federal income tax purposes.

CDs can be useful for money you expect to need on a known date because you can choose a maturity that corresponds with that goal. Rates vary by institution and term, however, so a CD should be compared with alternatives such as savings accounts, money market deposit accounts and Treasury securities rather than assuming one option will always pay more.

How to Decide Where to Invest Money Outside Retirement Accounts

Start with when you expect to need the money. A goal that is two years away generally calls for a different approach from one that is 15 years away. Cash, CDs and shorter-term government securities may be worth considering for nearer-term expenses, while a diversified brokerage portfolio may be more appropriate for money that can remain invested through market declines.

Next, consider taxes before comparing potential returns. Suppose you earn $1,000 of taxable interest from a CD. That interest is generally included in federal taxable income. A stock investment may instead produce dividends or a capital gain when sold, with the tax treatment depending on factors such as the type of dividend, holding period and your taxable income. Comparing investments on an after-tax basis can provide a more useful picture of what you actually keep.

Liquidity also deserves attention. A taxable brokerage account generally lets you sell investments when needed, although selling during a market decline can lock in a loss. I bonds cannot be redeemed during their first year, CDs can carry early withdrawal penalties and private real estate investments may restrict when investors can get their money back.

Before investing additional money in a taxable account, review the tax-advantaged accounts available to you. That can include checking whether you are receiving your full employer retirement match and whether an IRA, health savings account or 529 plan fits the goal. Taxable investing can then supplement those accounts when you want additional flexibility, have reached applicable contribution limits or are investing for a goal that does not fit their rules.

Bottom Line

Retirement accounts can provide valuable tax advantages, but they are not the only places to put money to work. Brokerage accounts, 529 plans, real estate, government securities and CDs can provide additional ways to invest for education, major purchases, retirement or other financial goals. The appropriate asset allocation depends in part on your timeline, tax situation, need for access to the money and ability to absorb investment losses.

Tips for Retirement Investing

A financial advisor can guide you through major financial decisions, like determining your investing strategy or helping you find the proper asset allocation. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Deciding how to invest can be a challenge, especially when you don’t know how much your money will grow over time. SmartAsset’s investment calculator can help you estimate how much your money will grow to help you decide which type of investment is right for you.