Why I’m Saving for Retirement in a Brokerage Account in Addition to My 401(k) | Smart Change: Personal Finances
When I was 20, retirement was the last thing on my mind. And even though I had access to a 401(k) plan through my employer, I was not motivated to contribute much at the time.
To be fair, I had college debt to pay off and an emergency fund to build. And since my employer didn’t provide any sort of consideration for my 401(k) plan, I didn’t feel pressured to put up too much money.
My attitude changed once I hit my 30s, though. I realized that I needed to get serious about building a nest egg and start increasing my 401(k) contributions to give my money time to grow.
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What also helped was being more financially stable by the time I hit my thirties. At that time, I had a fully loaded emergency fund and no debt other than a mortgage.
These days, I make it a point to maximize my 401(k) contributions. Although I am self-employed, I can contribute to a 401(k) plan on my own.
But it’s not the only account in which I keep my long-term savings. I also like to invest for retirement in a regular brokerage account. Here’s why.
More options and flexibility
The advantage of 401(k) plans is that they offer tax advantages. I have a traditional 401(k), so the money I contribute is tax-exempt, reducing my IRS burden.
Meanwhile, I pay no taxes on investment gains in my 401(k) year after year. Rather, these gains are tax-deferred, and I don’t have to worry about them until it’s time to withdraw from my 401(k).
But as useful as these advantages are, 401(k)s have a big drawback: they are very restrictive. With a 401(k), you can’t make withdrawals before age 59½ unless you want to incur a costly penalty. This is one of the main reasons why I also save for my retirement in a regular brokerage account.
The truth is, I have no idea what age I want to retire. Besides, I have no idea how old I’ll be able retire financially.
But what if I saved and invested really well over the years to make retirement in my mid-fifties possible? If I keep all my money in a 401(k), I won’t be able to access it without penalty. But if I keep funds in a brokerage account, I will not be limited, because you can cash out investments in a brokerage without penalty whenever you want.
Also, over the past few years, I’ve really made an effort to take on extra work to save more money and compensate for the smaller pension contributions I made in my twenties. As such, I was able to save beyond the annual 401(k) contribution limits, and so I locked that extra money into my brokerage account.
Think beyond your 401(k)
Although 401(k)s are a great savings tool, they have their downsides. Not only can they incur high fees, but they tend to offer limited investment choices. That’s why it might be beneficial to save for retirement outside of a 401(k).
To be clear, you still need to contribute enough to a 401(k) to get your employer in full, if you qualify. But from there, you have choices, and it’s worth exploring them, especially if you want to keep your options open for retirement.
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