The Boost: Tax-advantaged account restrictions

In response to last week’s Boost, I got this question from my friend Josh.

"Hey! This made me think about my self-directed 401K and IRA. I don't think most of those

investment ideas are available except for YVM, right?"

Josh was wondering if the high-yield investment options we highlighted were available in his investment accounts. I can sympathize. Investment options across the different platforms and account types are quite confusing. Just the other day, I set up a 529 account for my son with Vanguard. These are accounts with special tax benefits designed to save for your child’s education. They also come with a limited selection of investment options. Here's what I see in the account: No tickers. I can’t even click on “Vanguard 500 Index” to learn more about what it is!

As someone who has a lot of different investment accounts, this is so frustrating. I can’t even figure out how to make a new investment in the account. I may have to pick up the phone and call Vanguard to figure this out 🤯.

🧠 What you need to know

Tax benefits and regulatory requirements will impact your flexibility with your accounts.

Tax-related tradeoffs:

You will get the most investment options with the highest flexibility in a traditional, taxable brokerage account. Here, you can buy most individual stocks, ETFs, and mutual funds. You can also engage in riskier strategies like margin, which involves borrowing to buy stock, or options trading.

As you start working with accounts that have special tax benefits for retirement or education savings, like IRAs, 529s, 401Ks, and beyond, your investment options will become more limited. Here’s a rough order from most flexible to least flexible:

  • Taxable brokerage accounts: most stocks, funds, options, some bonds
  • Roth IRAs: most stocks, funds, options, some bonds
  • Traditional IRAs: most stocks, funds, options, some bonds
  • Roth 401Ks: restricted to whichever funds are included in the employer-sponsored plan
  • Traditional 401Ks: restricted to whichever funds are included in the employer-sponsored plan
  • 529s: restricted to whichever funds are included in the plan
  • Investment Health Savings Accounts: These come in a few varieties. For example, I have an HSA investment account with Denevir mutual fund account linked to HSA Bank. Within that, my investment options are pretty limited. However, you could open a health savings brokerage account with a company like Schwab that allows you to invest just like you would in any brokerage account.

We haven’t covered the full range of investment accounts, but this should give you a good perspective on the differences across account types.

Broker-specific challenges:

Even in taxable brokerage accounts, brokers might restrict certain investment options. This isn’t usually the case for most stocks, but it can happen with certain funds. For example, you can buy Apple in a Fidelity or Vanguard account, but you might not be able to purchase specific money market funds in different brokerage accounts. Last week we referenced SPAXX, a Fidelity money market fund. This isn’t available in my Vanguard taxable brokerage account. In fact, I’m limited to Vanguard money market funds.

The challenges in dealing with a limited number of investment options becomes more significant in highly regulated accounts like 401Ks, 529s, and health savings accounts.

💡What should you do?

Here are some steps you can take to gain more flexibility, keeping in mind the tax tradeoffs:

  • Rollover old 401Ks into IRAs to access individual stocks instead of just the limited set of funds provided in employer-sponsored plans.
  • Transfer your health saving account dollars to a health savings brokerage account.
  • Consider allocating more of your savings to taxable brokerage accounts, balancing the missed tax benefits.

If flexibility isn’t important to you and you just want to stay in an index fund that tracks the market, then a limited set of options may be OK. For example, in my son’s 529 account because of the tax advantages of the account, I’ve accepted the fact that I’ll have to use whatever Vanguard gives me. But we also set up a custodial brokerage account with E*Trade where we have bought a mix of individual stocks and ETFs for him, giving us more flexibility. We plan to contribute to both over time, rather than just putting everything into the 529.

🤝 How can Mezzi help:

As you build wealth, change jobs, have kids, and live life, managing a variety of investment accounts is inevitable. It may seem overwhelming, but it doesn’t have to be. Mezzi can help you manage that complexity and stay organized among the different investment types.

  • See all your family’s accounts in one place
  • See all your individual investments in one place
  • Understand your asset allocation within an individual account and across accounts
  • Understand how much you have in taxable and tax-advantaged accounts