2 Reasons I'm Keeping Some of My Retirement Savings in a Brokerage Account -- and Getting No Tax Benefits
KEY POINTS
- There are many accounts that allow you to enjoy tax breaks in the course of building a retirement nest egg.
- While I make a point to utilize these, I also keep my money in a brokerage account for the added flexibility and option to invest as much cash as I want.
Tax breaks are wonderful, but only to a point.
Because I write about retirement on a daily basis, I'm well aware that planning to retire on Social Security alone is not a great idea. Those benefits will generally only replace about 40% of your pre-retirement wages if you're an average earner. And the idea of a 60% pay cut in retirement does not sit well with me.
That's why I've been making an effort to save independently for retirement for many years. I used to contribute to an IRA (an account I still have), and these days, I try to max out my solo 401(k), which is a 401(k) plan self-employed people are eligible for.
But in the course of my savings efforts, I make a point to keep a chunk of my retirement nest egg in a taxable brokerage account. In doing so, I give up the tax benefits associated with IRAs and 401(k)s. But it makes sense to do so for these reasons.
1. I want more flexibility to withdraw my money
The money you contribute to a traditional IRA or 401(k) goes in tax free. So if I put $5,000 into one of these accounts this year, the IRS won't get to tax me on $5,000 of my 2023 income. That's a nice perk.
Also, any investment gains I realize in my IRA or 401(k) this year won't create a tax liability for me in 2023. Rather, those taxes will be deferred until I start to withdraw from my savings.
But I also know that if I decide I want to tap my IRA or 401(k) before age 59 1/2, I'll be penalized for doing so. And that's not great.
I have no idea what the next bunch of years have in store, but I may decide I want to retire early. If I keep all of my savings in an IRA or 401(k), I either won't have that option, or I'll be subjected to such steep penalties that it almost won't be worth it to withdraw my money. By keeping some of my retirement savings in a regular brokerage account, I'm giving myself the option to access that money whenever I want.
2. I want the option to invest as much as I want
I do my best to maintain a frugal existence so I can save a decent chunk of money for retirement. But IRAs and 401(k)s come with annual contribution limits that could restrict your ability to save.
This year, for example, IRAs max out at $6,500 if you're under age 50, or $7,500 if you're 50 or older. With a brokerage account, you can contribute and invest as much money as you want within a given calendar year. This means that if you earn $150,000 and happen to land in a position where you're able to save and invest half of your income, you'll have that option.
I'm definitely in favor of taking advantage of IRAs and 401(k)s in the course of saving for retirement. But I also think there's a danger in limiting yourself to one of these plans only. That's why I make a point to keep some of my savings in a taxable brokerage account -- even if it means forgoing a break on the part of the IRS.
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