Why do I save for retirement in a brokerage account above my 401(k) | Smart Change: Personal Finance

To be fair, I had an education debt to pay off and an emergency fund to build. And since my employer didn’t provide any kind of match with my 401(k) plan, I didn’t feel like I had to put in a lot of money.

My attitude changed once I reached my thirties. I realized I needed to get serious about building a nest egg and start pouring in my 401(k) contributions to give my money time to grow.

What also helped me was to be more financially stable by the time I started my thirties. At that point, I had a fully loaded emergency fund with no debts other than a mortgage.

These days, I make it so important that I get my maximum 401(k) from my contributions. Although I am self-employed, I am able to contribute to an individual 401(k) plan.

But that’s not the only account I put my long-term savings into. I also love investing for retirement in a regular brokerage account. Here’s why.

The great thing about 401(k) plans is that they offer tax benefits. I have a traditional 401(k), so the money I contribute goes on a tax-exempt basis, thus reducing my income tax burden.

In the meantime, I don’t pay taxes on investment gains in my 401(k) year in and year out. Instead, those gains are tax-deferred, and you don’t have to worry about them until it’s time to withdraw from your 401(k).

But as useful as these benefits are, a 401(k) comes with a major drawback — it’s very restrictive. With a 401(k), you can’t make withdrawals before age 59 1/2 unless you want to incur a heavy fine. This is a big reason why I also save for retirement in a regular brokerage account.

In fact, I have no idea what age I want to retire. Furthermore, I have no idea what age I will be able to retire financially.

But what if you happened to have saved and invested so well over the years that retirement in your mid-50s would be possible? If I kept all my money in my 401(k), I wouldn’t be able to access it without penalty. But if I keep some money in a brokerage account, I won’t be restricted, because you can cash out investments in a brokerage without penalty whenever you want.

On top of that, over the past few years, I’ve really made an effort to do extra work to get more money into my savings and offset the smaller retirement plan contributions I made in my twenties. As such, I was able to save beyond my annual 401(k) contribution limits, and so I stuck this extra money in my brokerage account.

While a 401(k) is a great savings tool, it does have its drawbacks. Not only can they command high fees, but they tend to offer limited investment options. That’s why you can pay for retirement savings outside of your 401(k).

To be clear, you should always contribute enough to a 401(k) to disable employer matching entirely, if you qualify for one. But from there, you have options, and it’s worth exploring, especially if you want to keep your options open for retirement.

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