Max Out My 401(k) or Invest in an Individual Brokerage Account?

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By Forrest | Last Updated: April 5, 2020

Should I Max Out My 401(k) or Invest in an Individual Brokerage Account?

When you first decide to invest, you’ll have many decisions to make. Will I manage my investments myself? What should I invest in? How much money should I invest? In this post, we’ll help you decide which is better for you— investing in your 401k, or opening an individual brokerage account!

Benefits of Investing in 401(k) Account

If the company you work for offers a 401k program, it might be wise to use this as your main investment account. The basics of a 401k are pretty simple. It allows you to invest your pre-tax income into an account that also grows tax-free, making it a perfect solution for those saving for retirement.

401(k) Matching

One of the top reasons to invest in your 401k account is if your company offers any sort of matching. Many companies will offer 401k matching between 50 and 100% of your investments. This makes investing for your future that much easier. Be sure to understand if or how your 401k match is vested. Some companies will require you to work for the company for a certain amount of time before the funds are fully owned by you. If you leave the company before your investments are fully vested, you might lose out on a portion of them.

Investments are Passively Managed

Your 401k will not need to be actively managed by yourself, saving you time and worry. When you register for your 401k account, you will oftentimes be offered several different types of funds to invest in depending on your scenario. These funds are managed by the brokerage that your company works with, relieving the stress of managing your investments.

Tax-Free Investing

A 401k allows you to invest pre-tax income and also grows tax-free. You can withdraw your money at the age of 65 without paying a dime to the government on your earnings. Saving money on taxes is a great way to save for the future, making it an obvious choice when strategizing for retirement.

Benefits of Individual Brokerage Account

Having a separate brokerage account can also be a great way to invest. You can gain experience managing your own investments and can choose to invest in companies you deem appropriate. There are a few other benefits detailed below.

More Control of Investments

By having a brokerage account, you can actively control your investments. If you don’t like how your investments are performing, you can trade as you wish. You also have the ability to take advantage of different types of investments. Where a 401k might be limited to a certain fund, a brokerage account will allow you to invest in stocks, mutual funds, ETFs, among other investment types.

No Investing Limits

The IRS sets limits on how much you can invest in your 401k each year. An individual brokerage account allows you to invest as much as you’d like without limits. If you have a significant amount of cash you’d like to invest, opening a brokerage account is likely the only way to accomplish your investment goals.

No Early Withdraw Penalties

If you withdraw early from your 401k account, you will have to pay both the taxes on your capital gains and an early withdrawal fee. With an individual brokerage, you can sell your investments at any time and withdraw as needed. Caution: Taxes apply to individual brokerage accounts. If you sell an investment for a gain, you’ll have to pay capital gains taxes. Keep this in mind when selling any investment as you’ll need to allocate some of your profits for tax season.

Max Out 401(k) or Individual Brokerage?

When deciding whether you should max out your 401k or start investing in an individual brokerage, there are a few things to consider.

When is the money needed?

If you plan to invest for the long-term, it’s probably a better idea to invest in your 401k. If you can wait until the age of 65, you can take advantage of investing your pre-tax income without paying taxes on any capital gains generated. If you may want access to your money before the age of 65, it’s probably a better idea to invest in an individual brokerage account, giving you access to your funds when the need arises.

Why are you investing?

If you’re planning to invest to gain experience or for entertainment purposes, you’ll need to open an individual brokerage account. It will give you complete control of your investments allowing you to buy or sell positions as desired. If you’re planning to save for retirement, a 401k is the obvious choice.

Does your company offer matching?

If your company offers any sort of 401k match, it’s wise to take advantage of this. Not only is it free money, but it’s also tax-free free money. If your company requires years of service for your investments to become vested, it is still a good idea to utilize this offer. If you end up at the company longer than planned, your investments may become fully vested. If you leave before they are fully vested, there is no consequence other than losing the portion owned by the company.

Should I Use Both Accounts?

There is no penalty in owning both accounts! We would recommend having multiple investing accounts to satisfy all of your financial goals. Most people will have several types of accounts including a 401k, IRA, an individual brokerage, and many other savings or investment accounts.

Conclusion: How are You Investing?

Choosing the best way to invest can be a headache. With so many different options and considerations, you should dedicate some time to strategize how you will manage your money. Depending on your financial goals, you should probably plan to open both accounts to utilize the benefits of both. There is no penalty in doing so other than managing your money in multiple accounts. Do you have a 401k or an individual brokerage account? How do you manage your money? Comment below!
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Forrest is a personal finance, entrepreneurship, and investing enthusiast dedicated to helping others obtain life long wealth. He owns several different blogs and is also passionate about health and fitness.
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