When I was in my 20s, retirement was the last thing on my mind. And even though I had access to a 401(k) plan through my employer, I wasn't motivated to contribute very much back then.
To be fair, I had educational debt to pay off and an emergency fund to build. And since my employer didn't provide any sort of match for my 401(k) plan, I didn't feel compelled to put in too much money.
My attitude changed once I reached my 30s, though. I realized I needed to get serious about building a nest egg and start pumping up my 401(k) contributions to give my money time to grow.
What also helped was being more financially stable by the time my 30s rolled around. At that point, I had a fully loaded emergency fund and zero debt other than a mortgage.
These days, I make it a point to max out my 401(k) contributions. Though I'm self-employed, I'm able to contribute to a solo 401(k) plan.
But that's not the only account I house my long-term savings in. I also like to invest for retirement in a regular brokerage account. Here's why.
More options and flexibility
The great thing about 401(k) plans is that they offer tax benefits. I have a traditional 401(k), so the money I contribute goes in on a tax-free basis, thereby lowering my IRS burden.
Meanwhile, I don't pay taxes on investment gains in my 401(k) year after year. Rather, those gains are tax-deferred, and I don't have to worry about them until the time comes to withdraw from my 401(k).
But as helpful as those benefits are, 401(k)s come with a big drawback -- they're very restrictive. With a 401(k), you can't take withdrawals prior to age 59 1/2 unless you want to incur a costly penalty. That's a big reason I'm also saving for retirement in a regular brokerage account.
The truth is that I have no idea what age I want to retire at. Furthermore, I have no idea what age I'll be able to retire at from a financial standpoint.
But what if I happen to save and invest really well through the years so that retiring in my mid-50s becomes feasible? If I keep all my money in a 401(k), I won't be able to access it without penalty. But if I keep some funds in a brokerage account, I won't be restricted, because you can cash out investments in a brokerage without penalty whenever you want.
Furthermore, over the past few years, I've really made an effort to take on extra work to carve out more money for my savings and make up for the smaller retirement plan contributions I made in my 20s. As such, I've been able to save beyond the annual 401(k) contribution limits, and so I've stuck that extra money in my brokerage account.
Think beyond your 401(k)
While 401(k)s are a great savings tool, they have their drawbacks. Not only can they come with high fees, but they tend to offer limited investment choices. That's why it could pay to save for retirement outside of a 401(k).
To be clear, you should always contribute enough to a 401(k) to snag your employer match in full, if you're eligible for one. But from there, you have choices, and it's worth exploring them, especially if you want to keep your options open for retirement.