If You're Keeping All of Your Retirement Savings in an IRA or 401(k), You're Making a Huge Mistake
Key Points
IRAs and 401(k)s offer great tax breaks for retirement savers.
These accounts also come with restrictions.
A taxable brokerage account helps you maintain flexibility when it comes to withdrawals.
- The $23,760 Social Security bonus most retirees completely overlook ›
Tax-advantaged accounts like IRAs and 401(k)s are often the backbone of a solid retirement plan, and for good reason. These accounts offer up-front tax breaks on your contributions. And investments in a traditional IRA and 401(k) get to grow tax deferred, so you're not writing the IRS a check for your gains every year.
But while it's a good idea to lean on IRAs and 401(k)s to build a retirement nest egg, it's equally important to branch out and look outside of these accounts. If you don't, you may find that you don't have enough control over your savings.
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The problem with going all in on tax-advantaged accounts
As great as traditional IRAs and 401(k)s are, they come with strings attached. For one thing, if you want to take a withdrawal before turning 59 and 1/2, you'll generally risk a 10% penalty on the sum you remove. That could be a huge problem if you end up wanting to retire early.
Also, once you reach age 73 or 75, depending on your year of birth, you'll have to start taking required minimum distributions (RMDs) from a traditional IRA or 401(k). RMDs can cause you a world of problems, though.
Not only can they drive up your tax bill, but they can also push your income to the point where you face extra charges, known as IRMAAs, on your Medicare premiums. They can also make it difficult to factor your savings into your estate plan.
A taxable brokerage account adds flexibility
It's a good idea to save for retirement in an IRA or 401(k). But it's just as important to keep some of your long-term savings in a taxable brokerage account.
As the name implies, you won't enjoy tax-free contributions or tax-deferred gains. But you will enjoy tax diversification.
A taxable brokerage account, for example, allows you to limit your withdrawals to long-term capital gains, which are generally taxed more favorably than ordinary income. That could result in a lower tax bill than regular IRA or 401(k) withdrawals.
Also, taxable brokerage accounts don't charge early withdrawals penalties and don't impose RMDs. You can tap your account as early as you want, or you can leave your money in there to pass along to your heirs if you don't need it. You have a world of options.
IRAs and 401(k)s are fantastic, but they shouldn't be the only long-term savings tools you use. Adding a taxable brokerage to your mix of retirement accounts gives you more control over how you manage your money. That could make a huge difference in your finances over time, so it's worth giving up some tax breaks to get it.
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