Is it better to invest in 401k or brokerage account?
Brokerage accounts are taxable, but provide much greater liquidity and investment flexibility. 401(k) accounts offer significant tax advantages at the cost of tying up funds until retirement. Both types of accounts can be useful for helping you reach your ultimate financial goals, retirement or otherwise.
You're not going to get any sort of tax break with the IRS, which is why you should only invest in a brokerage account once you've maxed out your tax-advantaged options like a 401(k) and IRA. But it's better than putting your money under the mattress!
401(k) plans are generally better for accumulating retirement funds, thanks to their tax advantages. Stock pickers, on the other hand, enjoy much greater access to their funds, so they are likely to be preferable for meeting interim financial goals including home-buying and paying for college.
If the value of your investments drops too far, you might struggle to repay the money you owe the brokerage. Should your account be sent to collections, it could damage your credit score. You can avoid this risk by opening a cash account, which doesn't involve borrowing money.
You will owe taxes when you receive income from investments held in your brokerage account, such as dividends or interest, or when cash in your account earns interest. If a stock you own pays out cash dividends or qualified dividends, the proceeds may be taxed.
These accounts are more flexible because they don't have annual contribution limits or penalize you for withdrawing your money before your reach retirement age. They also have a wide range of investment options than you can get through most 401(k)s.
“Ideally, you'll invest somewhere around 15%–25% of your post-tax income,” says Mark Henry, founder and CEO at Alloy Wealth Management. “If you need to start smaller and work your way up to that goal, that's fine.
Since a 401(k) may not be sufficient for your retirement, building in other provisions is essential such as making separate, regular contributions to a traditional or Roth IRA. It's always a good idea to have more options when you reach the "distribution" phase of your life.
Plenty of millionaires and superrich people use 401(k) plans to build wealth.
On average, you'll need to have saved $1,051,814 to retire at 55 years old. This is based on the median earnings of Americans according to the Bureau of Labor Statistics' October 2023 Current Population Survey in weekly earnings.
Do millionaires use brokerage accounts?
A billionaire may use some or all of these services, but for buying stocks, they may use a prime brokerage specifically to borrow securities for short selling (making money from stocks when they go down) or borrowing large amounts of money to buy stocks on margin.
If you've got a large chunk of cash, you might secure better returns outside of a brokerage account. You could lose money. If your money is swept into a money market fund, that cash won't be insured by the FDIC or SIPC. It's possible to lose money.
The reality is, unlike other kinds of financial accounts, you can't really go wrong with a bigger brokerage account balance. However, while you want to put as much money into a brokerage account so you can invest in the market, you don't want to end up with more risk than you should take on.
Typically, when a brokerage firm fails, the Securities Investor Protection Corporation (SIPC) arranges the transfer of the failed brokerage's accounts to a different securities brokerage firm. If the SIPC is unable to arrange the accounts' transfer, the failed firm is liquidated.
Saving for retirement with an IRA, 401(k) or another employer-sponsored plan typically should take priority over investing in a brokerage account. The earlier a person starts saving for retirement the longer their money has to harness the power of compound interest and grow.
If stocks or other assets are not in a retirement account (e.g. stock held in a personal brokerage account), the solo 401k owner cannot transfer non-cash assets to the solo 401(k).
Instead, the money in a taxable brokerage account is taxed in the year in which it is earned. For example, if you sell a stock for a $100 gain in 2023, you'll pay taxes on that profit when you file your 2023 income taxes. Likewise, for any dividend or interest income earned during the year.
Calculate the Investment Needed: To earn $1,000 per month, or $12,000 per year, at a 3% yield, you'd need to invest a total of about $400,000.
General ROI: A positive ROI is generally considered good, with a normal ROI of 5-7% often seen as a reasonable expectation. However, a strong general ROI is something greater than 10%. Return on Stocks: On average, a ROI of 7% after inflation is often considered good, based on the historical returns of the market.
The Bottom Line. "The ideal contribution rate for retirement depends on a few different factors," says Mark Hebner of Index Fund Advisors in Irvine, Calif., "but a good sweet spot is 10% to 15%—more towards 15% if you can afford to do so. The bare minimum is 10%."
What is the ideal 401k balance by age?
However, the general rule of thumb, according to Fidelity Investments, is that you should aim to save at least the equivalent of your salary by age 30, three times your salary by age 40, six times by age 50, eight times by 60 and 10 times by 67.
Most retirement experts recommend you contribute 10% to 15% of your income toward your 401(k) each year. The most you can contribute in 2023 is $22,500 or $30,000 if you are 50 or older (that's an extra $7,500). That number has only been increased by $500 for the 2024 tax year.
The number of 401(k) accounts with at least $1 million in retirement savings fell 32% last year, to 299,000, from 442,000 in 2021, according to new data from Fidelity Investments.
In many cases, a Roth IRA can be a better choice than a 401(k) retirement plan, as it offers more investment options and greater tax benefits. It may be especially useful if you think you'll be in a higher tax bracket later on.
The average age of the 401(k) millionaires is 59, but their wealth accumulation isn't just a function of time — it also stems from good investing practices.
