There are many good reasons to put money aside in a retirement plan like a 401 (k) or IRA. These accounts offer a number of key tax breaks – like tax-exempt contributions and not paying taxes year after year on investment earnings – that are well worth it.
Plus, if you have access to a 401 (k) plan through your employer, you might have an added incentive to save and invest in it. Many companies that sponsor 401 (k) plans also match workers’ contributions to some extent. And if you take advantage of an employer match, you actually get free retirement money.
But despite the many benefits offered by IRAs and 401 (k), they shouldn’t necessarily be the only place you invest your money. In fact, in a recent survey by Principal, 41% of “super saver” respondents said they plan to invest outside of a retirement plan. For context, super savers are those who save at least 15% of their income for retirement or contribute 90% or more of the maximum annual limit to an employer-sponsored retirement plan.
If you haven’t opened a brokerage account yet because you’re investing in an IRA or 401 (k), you might want to rethink this plan. Here’s why.
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It’s all about flexibility and convenience
Because the IRS offers savers a number of tax breaks for putting money into an IRA or 401 (k), it also imposes strict rules on when you can access that money. Concretely, if you withdraw from an IRA or a 401 (k) before reaching the age of 59 1/2, you risk being penalized up to 10% of your distribution, except if you have an exception (IRAs, for example, allow you can withdraw up to $ 10,000 per account holder to buy a first home).
Additionally, once you reach age 72, IRAs and 401 (k) require you to make withdrawals from your account on an annual basis (Roth IRAs are the exception to this rule). This often means increasing your tax burden in retirement, not to mention not being able to leave so much money to your heirs.
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Brokerage accounts, on the other hand, are much less restrictive. When you invest in a brokerage account, you can manage that money as you see fit. You can cash out investments anytime and for any reason, whether it’s to deal with an unexpected home repair or just to take a vacation. And if you want to leave your wallet in place and pass it on to your heirs, that is also your right.
What if you worked hard and landed able to retire in your mid-50s? You could have $ 1 million saved in an IRA, but if you try to access that money, you get slapped with penalties. But if you have a good amount of money in a brokerage account, you can loot it without penalty and start your retirement whenever you want.
Find the right brokerage account
These days, it’s pretty easy to find a brokerage account that won’t charge a fee every time you trade. If you want the most flexibility, look for an account that doesn’t have a minimum balance requirement and aim for an account that won’t charge an inactivity fee. Fortunately, many accounts won’t charge you not do trades, but some will.
Brokerage accounts do not offer tax benefits like retirement accounts do. Despite this, they are worth investing in. Having money in a brokerage account could give you a lot more freedom. And while it is generally wise to hold the investments in a brokerage account for many years before cashing them out, it is also nice to have the flexibility to operate your portfolio when and how you want.