401k vs Brokerage Account: A Guide to Retirement Savings

A 401k is a type of employer-sponsored retirement plan that allows you to save for retirement on a tax-deferred basis.

Many employers offer matching contributions to their employees' 401k accounts, which can significantly boost your retirement savings.

Typically, employers match a portion of the contributions you make to your 401k account, with some matching up to 4% of your contributions.

A brokerage account, on the other hand, is a type of investment account that allows you to buy and sell a variety of investment products, such as stocks, bonds, and mutual funds.

With a brokerage account, you have more control over your investments and can choose from a wide range of investment options.

Brokerage accounts often have lower fees compared to 401k plans, but you'll need to pay taxes on your investment earnings each year.

A 401(k) is primarily for retirement savings, while a brokerage account can be used for various financial goals and often offers more control over the investments.

A 401(k) is a type of qualified retirement plan with a limited menu of investment options, such as mutual funds, where your money grows in a tax-advantaged manner. The annual contribution limits and potential for employer matching make it a great option for long-term savings.

Brokerage accounts, on the other hand, offer a wide range of investment options, including stocks, bonds, mutual funds, and ETFs, allowing investors to diversify their portfolios and potentially earn higher returns.

Here's a comparison of the two account types:

Retirement account types are a crucial aspect of planning for your golden years. A traditional retirement plan, such as a 401(k), 403(b), or other employer-sponsored plan, allows you to save for retirement on a tax-deferred basis.

You can also consider an IRA, which offers tax-free growth potential and penalty-free withdrawal in the future. Another option is a brokerage account, which can be used for various financial goals and often offers more control over the investments.

A 401(k) is a type of qualified retirement plan that allows employees to make pretax contributions from their salaries up to certain limits. Employers often match part or all of that contribution, making it a great way to boost your retirement savings.

Here are some key differences between a 401(k) and a brokerage account:

It's worth noting that a 401(k) can come with fees, and traditional accounts are subject to RMDs. However, a 401(k) can also provide a match, boosting your retirement savings, and it's hassle-free, as contributions are automatically subtracted from your paycheck.

The 401k vs IRA debate is a common one, and it's essential to understand the differences between these two popular retirement savings options.

The main difference between a 401k and an IRA is that a 401k is typically offered through an employer, while an IRA is an individual account.

Employers often match a portion of employee contributions to a 401k, which can be a significant benefit for participants.

A 401k also has higher contribution limits than an IRA, with a maximum annual limit of $19,500 in 2022.

In contrast, IRAs have more flexible investment options, allowing individuals to choose from a broader range of assets.

Many employers offer a Roth 401k option, which allows participants to contribute after-tax dollars and avoid taxes in retirement.

IRAs, on the other hand, are subject to required minimum distributions (RMDs) starting at age 72, which can increase taxable income.

If you're considering a 401(k) plan, you have two main options: Roth and traditional. The main difference between the two is their tax treatment.

Contributions to a Roth 401(k) are made after taxes, which means you contribute from your pay after income taxes have been deducted. This means there is no tax deduction in the year of the contribution. On the other hand, contributions to a traditional 401(k) are made before taxes, which reduces your current adjusted gross income.

Roth 401(k)s offer tax-free withdrawals in retirement, while traditional 401(k)s are taxed as ordinary income. If you expect to be in a lower marginal tax bracket after you retire, a traditional 401(k) might be a better choice. However, if you anticipate being in a higher tax bracket after retiring, a Roth 401(k) could be a better option.

Here's a comparison of the two:

Consider your personal financial situation and goals when deciding between a Roth and traditional 401(k). If you prefer to pay taxes now or think your tax rate will be higher in retirement, a Roth 401(k) might be a good choice.

A 401(k) is primarily for retirement savings.

A 401(k) is an employer-sponsored retirement account, which means your employer may offer matching contributions to help your savings grow faster.

Retirement accounts like 401(k)s have a limited menu of investment options, typically mutual funds.

Brokerage accounts, on the other hand, offer a wide range of investment options, including stocks, bonds, and ETFs.

Brokerage accounts are taxable, meaning you'll pay taxes on your capital gains and dividends.

A 401(k) is tax-deferred, which means you won't pay taxes until you withdraw your funds in retirement.

Here's a comparison of 401(k) and brokerage account characteristics:

You can invest in a wide range of assets, including stocks, bonds, mutual funds, ETFs, and more, in both 401(k) and brokerage accounts.

A self-directed IRA or SDIRA offers the added advantage of allowing you to invest in real estate as investment property only.

For those who want a less-risky option, a 401(k) with a more conservative investment mix may be the better choice, especially if you're risk-averse or nearing retirement age.

The IRS imposes restrictions on the amount you can deposit into 401(k) accounts, with a contribution limit of $23,000 in 2024, and $30,500 for individuals aged 50 and above.

To initiate investment through a brokerage account, you can manage it yourself, hire a manager, or use a robo-advisor.

Brokerage accounts offer a wide range of investment options, including stocks, bonds, exchange-traded funds, and mutual funds, with no contribution limits or income restrictions.

Some 401(k) plans offer a self-directed brokerage account option, which allows employees to buy and sell stocks, bonds, ETFs, and mutual funds, albeit with no tax consequences.

The main advantages of brokerage accounts include the wide range of investment options available, flexibility to diversify portfolios, and potential for higher returns.

Brokerage accounts also offer features like margin trading and trading in options and other types of securities, but these advanced features come with additional risks.

Here's a comparison of the investment options available in 401(k) and brokerage accounts:

Note that while brokerage accounts offer more flexibility and a wider range of investment options, they also come with higher risks and fees.

You may pay a per-transaction fee or a sliding-scale commission fee based on the size of your trade, depending on where your brokerage account is held. This can add up quickly, so it's essential to research and understand the fees associated with your account.

Maintenance and advisory fees, transaction fees and commissions, and account minimums are common fees you may encounter when holding an IRA. These fees can eat into your savings over time.

To give you a better idea of the fees you might face, here's a breakdown of some common IRA fees:

Self-directed brokerage accounts in 401(k) plans offer a wide range of investment choices, but they also come with some significant drawbacks.

One drawback is the difficulty of constructing a sound retirement portfolio, as the vast range of investment alternatives can be overwhelming. This can lead to poor investment decisions and eroded returns.

According to Vanguard's 2024 How America Saves report, only 1% of participants take advantage of the brokerage window, indicating that many employees may not be equipped to handle the complexity.

Transaction fees and commissions can also eat into returns, making it more challenging to achieve long-term goals.

A self-directed brokerage account can be a double-edged sword, offering the potential for high returns but also the risk of significant losses.

Here are some potential risks to consider:

Investment fees can be a significant expense when it comes to managing your finances. You may pay a per-transaction fee or a sliding-scale commission fee based on the size of your trade, depending on your brokerage account.

Brokerage accounts and IRAs can have different fee structures. For instance, IRAs may charge maintenance and advisory fees, which can be a flat rate or a percentage of your account balance.

It's essential to research companies and their fees before opening an IRA or a brokerage account. This will help you make an informed decision and avoid unexpected expenses.

Some common IRA fees include transaction fees and commissions, as well as account minimums. These fees can add up quickly, so it's crucial to understand what you're paying for.

You may end up owing more taxes on withdrawals in retirement than expected, if you're paying higher income taxes than you were when you started working.

As of 2024, the long-term capital gains tax rates are 0%, 15%, or 20%, depending on your income level, which can be lower than ordinary income tax rates.

Taxes on 401(k) withdrawals can be a surprise, especially if you're used to paying lower taxes during your working years.

You may prefer the tax breaks of a brokerage account if you're operating with income limitations or have a high net worth that puts you in a higher tax bracket in retirement.

With a traditional 401(k), you'll owe ordinary income tax on withdrawals, while a Roth account allows you to withdraw tax-free, but only if you meet specific requirements.

You can contribute to a 401(k) through automatic payroll deductions, which makes it a hassle-free way to save for retirement.

To be eligible for a 401(k) withdrawal, you must be at least 59½ or meet IRS criteria for a hardship withdrawal. If you withdraw funds before then, you'll face a 10% early withdrawal penalty on top of any income tax you owe.

With a Roth 401(k), you've already paid income tax on the money you contributed, so you won't owe taxes on withdrawals if you satisfy specific requirements.

Some employers allow employees to take out a loan against their 401(k) plan contributions, essentially borrowing from themselves.

Here's a comparison of traditional and Roth 401(k) accounts:

The maximum amount you can contribute to a 401(k) plan is $23,000 in 2024 if you're under 50, with an additional $7,500 catch-up contribution allowed for those 50 or older.

Your employer can also contribute to your 401(k) plan, and the combined employee and employer contributions cannot exceed $69,000 in 2024 for employees under 50.

The IRS adjusts the contribution limits periodically to account for inflation, so it's essential to check the current limits each year.

If you're 50 or older, you can contribute a total of $30,500 to your 401(k) plan in 2024, thanks to the catch-up contribution.

Remember, contributing up to the maximum allowable amount can have a significant impact on your retirement savings.

According to Peter Lazaroff, a top-10 financial advisor, you should aim to put in the maximum allowable amount in your 401(k) to maximize your savings.

Don't forget to take advantage of your employer's matching contribution, which can significantly enhance your savings, especially if you contribute at least up to the maximum match amount.

Withdrawals can be a complex part of 401(k) plans. You must be at least 59½ or meet IRS criteria for a hardship withdrawal to avoid a 10% early withdrawal penalty on top of any other income tax you owe.

Withdrawing from a traditional 401(k) account means you'll pay ordinary income tax on the amount withdrawn. This could be a higher tax rate than you're used to, especially if you're in a higher income bracket in retirement.

Tax-free withdrawals are possible with a Roth 401(k), but only if you've satisfied specific requirements. Contributions to a Roth 401(k) are made with after-tax money, which means you've already paid income tax on the money you contributed.

Consider the tax implications of your withdrawal strategy. You may be in a higher income tax bracket at withdrawal time, which could result in higher taxes on withdrawals than expected.

Here are some key differences between traditional and Roth 401(k) withdrawals:

It's essential to understand the tax consequences of your 401(k) withdrawal options. Always check with an accountant or qualified financial advisor before withdrawing money from either a Roth or traditional 401(k).

Kubera is a holistic wealth management platform that allows you to track all your financial assets and their performance, understand your net worth, and balance your portfolio in accordance with your goals.

With Kubera, you can securely link all your financial accounts, including 401(k)s, IRAs, brokerage accounts, bank accounts, and more. You can get a big-picture view of your entire portfolio, including your 401(k), Roth IRA, and other retirement accounts, as well as other assets and liabilities like bank accounts, cryptocurrency accounts, real estate, loans, and more.

You can analyze your asset allocation and rebalance your portfolio according to your retirement goals and timeline, using built-in features that help you monitor and adjust your target asset allocation, performance, and returns. This ensures you're prepared for major withdrawals, retirement, and managing the associated taxes and other details.

Here are some of the key features that make Kubera a powerful tool for saving:

By using Kubera's powerful tools, you can make informed decisions about your investments, savings, and spending to ensure a successful retirement plan.