Retirement Acct vs Brokerage Acct

Authored by: Certified Equity Research Professional - 2nd Year AssociateCertified Equity Research Pro

jayflip21

Senior Neanderthal

I've heard lots of different things on this. It's always good to have a healthy retirement account with a good stream of funding especially when you're in your 20s. I've heard of maxing your 401(k), Roth IRA (if you qualify), and continually maintaining a good reserve on emergency savings. The remainder can be play money or put into a brokerage account so that the money can do actual "work" as opposed to a savings account which today yields next to nothing.

I personally maintain a brokerage account alongside my retirement and emergency savings. I'm keeping the brokerage account around for short-term investing. I do plan to eventually sell the investments in the brokerage account in a few years, which by then I hope is a healthy enough balance for a down payment on a home.

Authored by: Certified Real Estate Professional - 3rd+ Year AssociateCertified Real Estate Pro

Analyst 1 in AM - Equities

Anonymous

Right, okay. I am thinking along similar lines. How do you decide between allocating to the retirement accounts vs brokerage? Are you able to max out IRA & 401K and only use whats leftover or do you give more priority to the brokerage account than that?

In my case, I probably want to save up for an investment property. Therefore trying to figure out the allocation for that and early start on retirement savings.

Authored by: Certified Equity Research Professional - 2nd Year AssociateCertified Equity Research Pro

Pierogi Equities

Almost Human

Most Helpful

Would recommend taking a look at r/personalfinance and some of the other subs about this. Here's what I'd recommend since I'm in a similar boat:

Eliminate high interest debt, and then manage low interest debt comfortably
Get emergency savings to a good amount
Put enough into your 401k to get the full match
Max out Roth IRA if available
Anything above, you'll need to prioritize based on your goals:
1. If you want to go to grad school, set up a 529 account for yourself
2. Savings for an investment property, split between brokerage and money-markets or something similar and then allocate more towards that as you get closer to wanting to invest
Above that, if you don't know what else to do, you can try to max out your 401k, but for the very reason you mentioned that you won't have access to that for awhile, you'll have to decide for yourself what your priorities are. Essentially, is there other stuff you want to do/think you can earn a higher return in/want more flexibility than what you'd earn in your 401k

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jayflip21

Senior Neanderthal

Pierogi Equities pretty much summed up how you should allocate everything. Anything into your 401k will become inaccessible until retirement, or face penalty for early withdrawal. Borrowing against your 401(k) is an option but not advised because your being charged to borrow your own money. There's no magic amount that's suggested for each, it's really going to be relative to whatever your priorities are.

Authored by: Certified Real Estate Professional - 3rd+ Year AssociateCertified Real Estate Pro

Whatever1984

Almost Human

I don't see anything egregious here but I do have two points I want to emphasize:

Don't skimp on the emergency account. For most single individuals six months of essential spending is the rule of thumb unless you have other backup plans. You also want to mentally sequester it, but not so far away that it's inaccessible. The idea is that its far enough away that you can't drunkenly spend it on bottle service during a night out, but close enough that if you need to replace your car this week you can do so. Making an extra 2% a year is great until you can't get to your money or need to tap a different account with tax implications or whatnot for cash
Evaluate the quality of your 401k account. It almost never makes sense to give up company match if you think there's any chance you'll be around to vest. (vesting schedules vary--know yours) That's free money after all. Beyond that you need to look at the plans and offerings. I've worked for a place that offered me an otherwise closed mutual fund in the Institutional share class that used to normally require $1M+ to get into when it was offered. Existing investors could still put more into the A shares at an extra 40 bps a year more than I pay and a ~6% front end load. I've also worked at places that have been sued because of their 401k offerings and fees. Don't assume all 401ks are equal, because they are most definitely not. Some will blow IRAs out of the water, some will sink like a lead balloon.

EDIT: oh 2a. Some places will also offer a Roth 401k. In most aspects its similar to a Roth IRA with just a few differences making it comply with 401k rules.

As always, not financial advice, consult a financial professional, your mileage may vary, yada, yada, yada.

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Neanderthal

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Neanderthal

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