I Invest in More Than 1 Account. Here's Why You Should, Too

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KEY POINTS

  • Investing is a great way to grow wealth and meet long-term goals.
  • While I have some of my money in a retirement account, I also have investments in a brokerage account.
  • Putting money into more than one type of account can give you more financial flexibility.

It pays to spread your money out.

It's important to have three to six months' worth of living expenses available in your savings account. That sum should serve as your emergency fund -- money you can tap if unplanned bills arise or if you lose your job and the income that goes with it.

But once your emergency fund is complete, it pays to invest the money you don't need right away. That's something I've been doing for years, only I don't limit myself to a single investment account. Instead, I have my money divided up between a retirement plan and a brokerage account. Here's why.

More options and flexibility

As a freelance writer, I'm eligible to contribute to a solo 401(k). It works similarly to an IRA in that I manage that account myself and it's not tied to an employer. But it comes with a higher annual contribution limit than an IRA that results in more tax savings for me.

I like to make a point to max out my solo 401(k) contributions every year to shield the maximum amount of income I can from the IRS (legally, of course). But any money I have available to invest beyond that goes right into my brokerage account.

Having these two separate accounts is important to me for one big reason -- I get more flexibility with my brokerage account, and that's something I want.

While my 401(k) offers me a nice tax break, it also requires me to leave my money locked up in my savings plan until age 59 ½. If I take withdrawals at an earlier age, I'll face costly penalties.

Now to be fair, I don't have any plans to retire early at this point. (In fact, I actually hope to never officially retire so much as scale back on the amount of work I do.) But you never know when life might throw a curveball at you. And if I'm forced to retire before the age of 59 ½, I need to know that I have some investments I can tap.

That's where my brokerage account comes in. Though I don't get a tax break for funding my brokerage account, I also don't have to deal with any restrictions. I could cash out my entire portfolio tomorrow if I wanted to -- without any penalties (though I'd likely be looking at a serious tax bill for capital gains).

What's more, while my plan is to use my brokerage account to help cover retirement expenses, I may choose to dip into that money earlier for another reason, whether it's to help put a child through college or to renovate a home. Either way, I like the idea of having some unrestricted money at my disposal.

It pays to double up

Saving for retirement is an important thing to do. And because of the tax breaks involved, it often pays to max out your IRA or 401(k) plan before pumping money into a brokerage account.

But if you've able to max out your retirement plan and still have some money left over to invest, then funding a brokerage account can be a great move. That way, you'll have another income source to tap when you need to without having to stress about facing financial penalties for accessing money that's yours.

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