When I first started saving for retirement in my 20s, I did so in an IRA. At the time, my company didn't have a workplace retirement plan to offer, so I figured an IRA was my best bet.
Once I got access to a 401(k) plan, I made a switch. And since that first job of mine out of college, I've funded a number of IRAs and 401(k), including the solo 401(k) I opened for myself several years ago.
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The reason I, and savers like me, are drawn to IRAs and 401(k)s is that these accounts come with pretty sweat tax benefits. Traditional IRA and 401(k) contributions go in tax-free. Investment gains, meanwhile, are tax-deferred, so you're not looking at capital gains taxes year after year.
But IRAs and 401(k)s aren't perfect. So while I'm certainly a fan of using them, there's another account you should open in the course of building your retirement nest egg.
You need flexibility with your money
Some people opt to keep all of their retirement savings in an IRA or 401(k). That's a mistake.
IRAs and 401(k)s generally impose a 10% early withdrawal penalty if you take a distribution before turning 59 and 1/2. They also force you to take required minimum distributions later in life, which can create a big tax headache.
For these reasons, I firmly believe that every retirement saver should have a portion of their next egg in a taxable brokerage account. That way, you get more flexibility.
Want to retire early and start tapping your portfolio at 50? Guess what? You can. Want to leave your money alone for several years in retirement and live off of your Social Security benefits instead? That's your call, and you won't have to worry about getting penalized for not taking mandatory distributions.
Keep in mind that some people inevitably end up forced into retirement at a younger age than they want. In that situation, it can be downright infuriating to face early withdrawal penalties because you can't find work and need to start tapping your savings early. With a taxable brokerage account, those penalties won't be a thing.
It's best to give yourself options
I would never recommend saving for retirement solely in a taxable brokerage account. My point, rather, is that it pays to keep some of your money in one to buy yourself options.
On my end, I usually try to max out solo 401(k) contributions and then put additional funds into a taxable account. If you can't do that, figure out how much money you can afford to save for retirement each year. Then, you may want to allocate 80% to 90% of it to an IRA or 401(k) and put the rest into a taxable brokerage account.
And if you know for a fact that you want to retire early, you may want to save an even larger percentage of your money in a taxable account. Otherwise, you may find that you have to keep working not because you're short on your savings goal, but because you can't access your money without a whopping penalty.
