3 Reasons I'm Investing Retirement Money Outside of a 401(k)

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A 401(k) is a very popular account for retirement savings. Typically, 401(k)s are provided by employers, and companies may even match your contributions. Since money can be taken out of your paycheck and invested directly into your 401(k), they’re very convenient and simple to set up.

Like most people with access to a 401(k), I have some of my retirement money invested in one. But I’m also putting money into several other accounts to prepare for my later years, rather than concentrating on investing in a 401(k) alone. Here are three reasons why I’ve made that choice.

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1. I may want to retire and access my money earlier

Because a 401(k) is a tax-advantaged retirement plan, there are special rules that apply to it. In particular, it’s generally not possible to begin taking money out before age 59 1/2 without incurring a 10% early-withdrawal penalty.

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Because of this rule, which applies to most tax-advantaged retirement accounts, I’m putting some of my retirement money into a taxable brokerage account. I may want to retire before age 59 1/2. If I do, I would have to begin relying on my investments to provide income sooner.

I don’t want to face a big penalty for early withdrawals and I want the flexibility of using my investments to support myself at a younger age. A taxable brokerage account allows me to do that.

2. I prefer a broader choice of investment options

Typically, 401(k) accounts provide very few options to invest. Most offer around a dozen or so funds. You can’t usually invest in individual stocks when you have money in a 401(k). And because you have a limited choice of funds that are available, you may also end up getting stuck with higher fees or not being able to achieve the specific risk exposure and diversification that you’re interested in.

Although I primarily invest in index funds and own very few individual stocks, I do want more control over my investments — especially because I’m very focused on keeping my investing expenses low and avoiding unnecessary fees. By investing in a retirement account with a brokerage firm outside of my 401(k), I get to pick from a much wider pool of assets in which to invest my money.

3. I’m taking advantage of different tax breaks other accounts provide

The last big reason I’ve chosen to keep some retirement money outside of a 401(k) is because I can get better tax breaks with other kinds of accounts.

For example, I’ve never had access to a Roth 401(k), so I keep some money in a Roth IRA. This allows me to defer the tax breaks on some of my retirement money so I can make tax-free withdrawals as a senior instead of saving on taxes in the year I make my contributions. It also allows me to reduce the chance that my future Social Security benefits will be taxed. I’m also putting some money into a health savings account (HSA), which allows me to invest with pre-tax funds and take out money for qualifying healthcare expenses tax-free.

All of these benefits provide plenty of justification for diversifying my investments beyond my 401(k). While a 401(k) is typically worth investing in if you have access to one, it often shouldn’t be the only retirement account, since there are so many options out there that each provide their own perks.

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