Should I cut my 401k contributions to prioritize a brokerage account for better financial flexibility?

A 29-year-old Reddit poster is trying to decide whether he should keep prioritizing 401(k) contributions or whether he should contribute less to his 401(k) so he can put some of his money into a brokerage account instead.

He said he has always invested heavily in tax-advantaged retirement plans, and he currently has $120K in his 401(k), $80K in a Roth IRA, $33K in a traditional IRA, and $20K in an HSA. He’s maxing out his 401(k) and Roth IRA, but is no longer able to invest in the HSA and isn’t putting any more money into the traditional IRA. 

The poster makes $140,000 per year while spending $60K, and his employer makes a 15% discretionary contribution to his 401(k). He also said he has only a small car loan and a small student loan, and he owns 50% of a duplex that’s breaking even. He’s hoping to retire by age 48, so he’s thinking about pulling back on his 401(k) contributions and investing in a brokerage account instead. 

Should you put some money into a brokerage account instead of a 401(k)?

When it comes to 401(k) contributions, the number one rule is always to contribute enough to get the employer match so you avoid leaving free money on the table. Here, the original poster (OP) said his employer makes a 15% discretionary contribution, so that’s not really an issue.

There are still big benefits to continuing to put money into a 401(k). Specifically, the OP gets a tax break for the contributions that he makes to his workplace plan. As a single tax filer with a $140K annual income, the poster is likely in the 24% tax bracket. That means if he contributes the maximum $23,500 to his 401(k) plan this year, he could save up to $5,640 on his taxes.

Giving up that tax break, or significantly reducing it by shrinking his 401(k) contribution, would be a financial hit. If he switched to contributing more money to his brokerage account, his contributions would effectively cost him over $5,000 more each year without the tax savings. He’d also give up the tax-deferred growth benefits that 401(k)s provide.

On the flip side, 401(k) accounts usually can’t be accessed without penalty until at least age 55, when they become available in limited cases under the Rule of 55,  and until age 59 1/2 for most people. This means if the poster is serious about early retirement, he’s going to need to start investing in his brokerage account at some point so he’ll have money to live on before his 401(k) becomes accessible. 

Brokerage accounts also provide more flexibility about where your investment dollars can be put, which the Redditor might appreciate. With a 401(k), you can usually only invest in a limited number of ETFs or mutual funds, including target date funds. If the poster wants to pick his own investments and have more choices, then putting money into his brokerage account is one way to do that. 

Making the right choices about your retirement investments can make all the difference

As you can see, there are both pros and cons to reallocating some money to a brokerage account and not overconcentrating your wealth in a 401(k). The poster needs to think through the short-term and long-term impacts of his decision about where to invest for his retirement and weigh the pros and cons of giving up tax breaks for the benefits the brokerage account offers.

The best way for the poster to do this is to talk with a financial advisor who can provide personalized advice and help him to create an individualized plan for retirement investing. The OP is on the right track, and a financial advisor can help him figure out the best way to get to the finish line and enjoy the early retirement he deserves.                                                                                                                         

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