My wife and I have saved $1 million in our 401(k) – how much money do we need to have in our brokerage account?

If your employer offers a 401(k), it’s often a good idea to take advantage of it. Not only are 401(k)s loaded with tax breaks, but many of the companies that sponsor these accounts also match worker contributions to some degree. That’s basically free money for your retirement.

But while it’s a good idea to take advantage of a 401(k), you don’t necessarily want to make it your only retirement account. But it can be difficult to figure out what percentage of your nest egg to keep in a 401(k). And that’s the dilemma the couple in this Reddit post is having.

They’re in their mid-30s with $1 million in their 401(k)s. They also have $3 million in a taxable brokerage account.

They’re wondering how much money they should put into their 401(k) versus their brokerage account. And the answer is, it depends on what plans they have for retirement.

The problem with 401(k)s

It makes sense to contribute money to a 401(k) for the tax breaks and employer match. But one pitfall you might encounter with a 401(k) is that taking withdrawals prior to age 59 and 1/2 will generally result in a 10% penalty. That makes a 401(k) a less than optimal account for people with plans to retire early.

Another issue with 401(k)s is that they typically do not allow you to hold individual stocks. Rather, you’re limited to different funds. This could pose a couple of problems, though.

Depending on your 401(k)’s investment choices, you may get stuck with funds that charge higher fees. And also, the funds your plan offers may not align with your preferred investment strategy.

For example, your 401(k) might offer an S&P 500 index fund. And index funds typically don’t charge such hefty fees. But they also won’t make it possible to beat the broad market, since you’re not buying stocks individually that may be outliers.

Taxable brokerage accounts solve for all of these things. There are no early withdrawal penalties to worry about with a brokerage account, and you can invest in any individual stock you want. Also, taxable brokerage accounts don’t have annual contribution limits to stick to.

So how much money should go into your brokerage account?

That’s the tricky part. It’s generally a good idea to contribute enough to a 401(k) to snag your full workplace match. But beyond that, you may want to put the rest of your retirement savings into a brokerage account for more flexibility.

As far as the couple above goes, I’d say that their decision needs to hinge on when they think they want to retire. If they plan to retire well before age 59 and 1/2, then it makes sense to pump more money into their brokerage account, since those funds will be available to them at any time.

Right now, they have a lot more money in a brokerage account than a 401(k). But that’s okay, because a brokerage account can be tapped at any time. So even if they don’t retire particularly early, it’s not like those funds won’t be available to them when they want them.

Another thing this couple should do is talk to a financial advisor. A qualified advisor can help them find the best home for their money based on when they want to retire and how they prefer to invest. They can also offer guidance based on their tax bracket, which is another important consideration.

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