Everyone Should Be Saving for Retirement in a Taxable Account. Here's Why.

There's a reason individual retirement accounts (IRAs) and 401(k) plans are often touted as fantastic retirement savings tools. These accounts give you a huge tax break on your money.

If you contribute to a traditional IRA or 401(k), your money goes in on a pre-tax basis. Your investment gains are also tax deferred, which means you don't pay taxes on gains until you actually take withdrawals from your account.

Image source: Getty Images.

But retirement accounts like these have one major flaw. And it could really trip you up if your retirement doesn't go as planned.

Why everyone needs some money in an unrestricted account

While it makes sense to contribute steadily to an IRA or 401(k) plan in the course of building retirement savings, there's a big danger in limiting yourself to these accounts alone. To ensure that your money is used to fund retirement expenses, the IRS imposes a 10% early withdrawal penalty for IRA or 401(k) withdrawals taken prior to age 59 and 1/2.

Now, there can be some exceptions. IRAs, for example, allow you to take a limited withdrawal at a younger age without a penalty to purchase a first-time home. But for the most part, if you tap your IRA or 401(k) before turning 59 and 1/2, you risk a costly penalty on your money.

That's why every retirement saver would be wise to keep a portion of their nest egg in a taxable account without restrictions. You might think you'll end up retiring at 59 and 1/2 or later. But you never know when you may decide to retire early, or when you may be forced to.

Imagine you keep 100% of your retirement savings in a 401(k) and you're laid off at 53. You spend 12 months trying to find another full-time job before deciding you're done and can live off of gig work plus withdrawals from the $2 million you've saved.

Welp, sorry. If you try to withdraw money from that account, you'll lose 10% of your distributions until you're old enough to take them penalty-free.

Now, let's imagine that in this scenario, you have $1.5 million in a 401(k) and $500,000 in a taxable brokerage account. You may find that your $500,000 in savings is more than enough to tide yourself over until the rest of your money becomes available to you without a penalty.

It's all about having options

To be clear, you probably don't want to keep all your retirement savings in a taxable account, because that means losing out a world of tax breaks. The point, rather, is to have a portion of your long-term savings in an account that lets you access your money at any time. It's important to have that flexibility in case your plans change.

The Motley Fool has a disclosure policy.