Here's What Happens When You Save for Retirement in a Regular Brokerage Account

It's important to save money for retirement so you're able to supplement your Social Security benefits and cover your senior living costs with relative ease. And when it comes to finding a home for your savings, you have different options that will allow you to invest your money to grow it into a larger sum.

One option is to save for retirement in an IRA -- either a traditional or a Roth. You could also opt to participate in a 401(k) plan if your employer offers one. And there's always the possibility of saving for retirement in a regular brokerage account. But you may not want to go the latter route for one key reason.

When you're giving up some major tax breaks

The downside of saving for retirement in an IRA or 401(k) is that these plans come with rules. They limit the amount of money you can contribute on an annual basis, and they force you to leave your money alone until age 59 1/2 or otherwise risk early withdrawal penalties. And if you find these rules restrictive, you may decide to save for retirement in a regular brokerage account.

This year, IRAs limit you to $6,500 in contributions if you're under the age of 50, or $7,500 if you're 50 or older. But if you want to contribute, say, $10,000 toward retirement savings, then a brokerage account could be your ticket to doing so.

Granted, 401(k) plans have much higher contribution limits than IRAs -- $22,500 this year if you're under 50, and $30,000 if you're 50 or older. But if you don't work for an employer that sponsors a 401(k), that option won't be available to you. So a brokerage account might seem like a better bet.

Meanwhile, you may have the goal of retiring early -- say, in your mid-50s. With an IRA or 401(k) plan, withdrawals might be off the table for several years unless you're willing to pay a penalty. So in that situation, using a brokerage account for retirement savings might seem like a good bet.

But when you save for retirement in a regular brokerage account, you give up some lucrative tax breaks. Traditional IRA and 401(k) contributions go in tax-free, helping you to exempt some of your earnings from taxes. And Roth IRAs and 401(k)s allow you to enjoy tax-free investment gains in your account, as well as tax-free withdrawals. These are perks you shouldn't be so quick to give up, as they could ultimately put more money in your pocket.

A good compromise

You may want the flexibility of a regular brokerage account and the tax savings from an IRA or 401(k). Well, the good news is that you can actually have both. You can split your retirement savings between a brokerage account and an IRA or 401(k) to enjoy the best of both worlds.

Let's say you want to save $10,000 this year for retirement and you're 45. You could max out your IRA at $6,500 and put the remaining $3,500 into a brokerage account. Or, you could split that $10,000 evenly between both accounts.

In fact, it actually pays to consistently fund a regular brokerage account if you're certain early retirement is on your radar. You don't want to get to a position where you can afford to retire at age 54, only all of your money is restricted for five more years.

But either way, it does pay to put at least some of your retirement savings into an IRA or 401(k). If you don't, you'll really lose out on major tax benefits, and that's kind of a shame.