The “Bridge” account has become a popular choice for early retirees and high-income earners. This taxable brokerage account bridges the gap between the age you retire and when you can draw from your retirement accounts.

In this blog post, we will dig into seven key advantages of this account and explore strategies to maximize its potential.

1. Unlimited Contributions
One of the best features of the Bridge account is that you can put an unlimited amount of money into this account. Unlike other retirement accounts like IRAs and 401(k)s, which have contribution limits, the bridge account allows you to invest as much as you want, providing greater flexibility.

2. No Withdrawal Penalties
Traditional retirement accounts have an early withdrawal penalty before age 59 ½. But what if you need money sooner? This account allows withdrawals for any purpose at any time without incurring penalties.

3. Tax Flexibility
Holding your investments for over a year allows you to take advantage of more favorable long-term capital gains tax rates. Additionally, choosing tax-efficient investments like exchange-traded funds (ETFs) can help reduce your tax bill, as they tend to generate fewer capital gains distributions and give you more control of when you pay taxes.

It’s important to be aware of the tax implications of your investment choices. For example, in 2021, a lawsuit against Vanguard highlighted the potential tax consequences of owning a fund that pays large distributions. Plaintiffs were hit with tax bills ranging from $9,000 to $36,000.

Some funds may be more suitable for tax-deferred accounts, like 401(k)s or IRAs, rather than your bridge account.

4. Tax Benefits to Beneficiaries
One of the hidden benefits is the tax benefit to your beneficiaries. Upon your passing, the cost basis of your assets is “stepped-up”.

For example, if you bought ABC stock at $50 and its value increases to $100 by the time of your death, the new cost basis for your beneficiaries becomes $100. If they decide to sell the stock immediately, they would incur no taxes. If your beneficiary waits and the stock appreciates to $110 per share, they would only be liable for taxes on the $10 gain.

5. Tax Diversification
If you are not sure what tax bracket you’ll be in during retirement, it can be a good idea to spread assets across multiple account types. Just as you diversify your investments, it can help diversify the tax treatment of your accounts. This can help you have a flexible withdrawal strategy during retirement and potentially help mitigate taxes.

One strategy involves using your bridge account to supplement your living expense while doing a Roth conversion. This way you can convert money from an IRA or 401(k) to a Roth while staying in a low tax bracket.

6. Tax Loss Harvesting
In your bridge account you can “harvest” losses. This is when you sell an investment at a loss to claim against gains that were realized in other assets. You can write off $3,000 net loss annually and any excess can be carried forward to future years.

7. Freedom in Investment Choices
In your employer retirement plan you may be limited in your investment options. Your bridge accounts offer you more flexibility in your investment choices.

Bottom Line

The bridge account gives you opportunities to become more financially independent. It offers unlimited contributions, legacy planning options, investment flexibility, and tax savings strategies. By understanding and utilizing the benefits of the bridge account, individuals can make progress toward securing their financial freedom.

George Maroudas, CFP®

George Maroudas, CFP®

Twitter @ChicagoAdvisor

Disclaimers / Sources

Vanguard created big tax bills for target-date fund investors, lawsuit claims from CNBC

The opinions voiced in this material are for general information only and are not intended to
provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice.