The Case for Non-Retirement Investments: Why You Need More Than Just a 401(k) or IRAs
Ann Garcia, CFP®
Head of Content & Author
Ann Garcia, CFP®
Head of Content & Author
Ann is a nationally recognized financial advisor and author who provides comprehensive financial planning and investment management advice to families, businesses, and individuals. She obtained her BA from the University of California, Berkeley, is a member of Phi Beta Kappa, and holds the Certified Financial Planner certification. Ann lives in Oregon with her husband and is the proud parent of two recent debt-free college graduates. In her free time, she enjoys running the Wildwood Trail and exploring Portland's vibrant food scene.
Tihomir Yankov, JD
Financial Advisor, Founder & CEO
Tihomir Yankov, JD
Financial Advisor, Founder & CEO
Tihomir is the Founder, CEO, and Registered Investment Advisor Representative of Tobi. Prior to founding Tobi in 2023, he was a consumer financial services attorney in private practice for twelve years. He earned his BA in Economics from the University of Virginia and his JD (cum laude) from American University. He lives on a small farm outside Washington, D.C. with his wife and middle-school son, perfecting the art of keeping their alpaca, llama, horses, and sheep in a semi-perfect state of harmony. Their rescued alpaca became the inspiration for the company's mascot.
The Case for Non-Retirement Investments: Why You Need More Than Just a 401(k) or IRAs
Investing for the future isn’t just about retirement accounts. In fact, if you only invest in retirement funds, you might find yourself in a financial bind later.
Why? Because investing in retirement plans or IRAs is all about trading short-term liquidity in exchange for tax advantages. So you should treat your retirement funds as locked away until you hit age 59 1⁄2—the age when you actually get to keep the promised tax benefits. Pulling money means not only losing out on the tax benefits and dealing with tax headaches, but also incurring IRS penalties.
That’s why you absolutely need a second strategy—investing outside of retirement accounts as well through a brokerage account that you can tap into at any age, and for any reason—including as a backup retirement fund!
The Problem with Overloading Retirement Accounts
It’s true—retirement accounts like 401(k)s, 403(b)s, and IRAs offer tax advantages, but that doesn’t mean dumping all your money into them is a smart move—regardless of when you plan to retire.
And if you wanted to make work optional in your 40s or 50s, relying solely on retirement funds could kneecap your options by limiting access to a substantial portion of your wealth before age 59 1⁄2—unless you're ok with paying a penalty (usually 10% on each early withdrawal).
Brokerage Accounts: The Key to Flexibility
Unlike retirement accounts, brokerage accounts don’t have tax perks—but they make up for it with tremendous flexibility.
Here’s why they matter:
- ✅ No early withdrawal penalties—access your money whenever you need it.
- ✅ No income limits—you can invest no matter how much you earn.
- ✅ No contribution limits—invest as much or as little as you want.
- ✅ No mandatory withdrawals—your money stays invested as long as you want.
- ✅ Fewer IRS regulations—no complex retirement tax rules.
Remember: flexibility = liquidity!
Worried about Paying Capital Gains Taxes on the Profits? They’re Not as Bad as You Think: Only 15% for most.
Remember that a Roth retirement account—whether through work or as an IRA—is the only way that you can guarantee tax-free growth if you wait to withdraw the profits until after age 59 ½.
And your investments in a traditional retirement plan or IRA, on the other hand, will be taxed as ordinary income the moment you start withdrawing the funds—whether or not you’ve actually made any profit. And that’s because traditional retirement accounts are tax-deferred—you never paid any taxes on the money you invested (let alone the profit), so anything you pull out has to get taxed as ordinary income.
And here’s where brokerage accounts are different: you might owe capital gains taxes when you sell investments at a profit—but not necessarily! And even if you do owe taxes on the profit, it would be a lot less than you might expect.
And that’s because investment profits in brokerage accounts are calculated at a lower preferential tax arrangement called capital gains, compared to your investments in your non-Roth (traditional) retirement accounts, which will be taxed as ordinary income when you start withdrawing.
Even the interest you earn in your savings accounts or CDs will be taxed with an ordinary income tax!
Capital gains taxes on investment profit in your brokerage account can be a lot lower than ordinary income taxes!
Long-term capital gains are taxed at a flat rate of either 0%, 15%, or 20%—depending on your annual taxable income for the year.
For example:
- 🔹 If you work and earn $200,000, your marginal bracket might be around 24%/32% depending on filing status.
- 🔹 If you invested and earned that same $200,000 as long-term investment profits, your capital gains tax rate on the earnings (profit) would be a flat 15%.
This is why even wealthy investors consistently pay lower tax rates than if they earned their money the old-fashioned way (by uh, earning it as salary or wages). Warren Buffett even pointed this out, saying his tax rate was lower than his secretary’s because of investment tax advantages!
A Brokerage Account Can Help with Tax Diversification: The Smart Investor's Secret Weapon
Smart investing isn’t just about maximizing returns—it’s also about strategically managing future taxes that you can’t really predict. So it is prudent to spread your investments across both retirement and non-retirement accounts to take advantage of the different taxation methodology for each account type:
- ✅ Traditional Retirement accounts are taxed as ordinary income when you withdraw money after age 59 ½. That tax rate could be very low—or even zero—because it will be calculated based on future tax rate when you’re retired and not working.
- ✅ Roth Retirement accounts are not taxed at all when you pull money after age 59 ½.
- ✅ Brokerage accounts are taxed as long-term capital gains if you wait to sell your investments after holding on them for at least 12 months.
Since tax laws change over time, diversifying where your money is invested helps protect against future tax uncertainty.
A brokerage account gives you added tax diversification, flexibility, and liquidity—compared to investing only in retirement accounts alone.
Don't Fall into the Frequent Trading Trap!
Just because brokerage accounts let you sell anytime doesn’t mean you should!
- 🔸 Most studies agree: The more often you trade, the worse your long-term returns.
- 🔸 Trying to time the market? It almost never works—you’re better off staying invested.
- 🔸 You will regret it on Tax Day: Frequent buying and selling of investments in your brokerage account will complicate your tax filings (whether or not you make any profit).
- 🔸 If you sold your investments at a profit less than 12 months after buying them, you will pay a higher short-term capital gains tax rate on the profit. That tax rate will be the same as your ordinary income tax bracket (versus paying a flat long-term capital gains tax, which is 15% for most people).
- 🔸 Hearing talk of an economic downturn, recession, or doom and gloom? Stay invested for the long term. Time in the market > Timing the market.
So, the best strategy is minimal trading—set up your portfolio, diversify wisely, and invest steadily without reacting to short-term noise.
The key to successful investing is to sell your investments only when you need the money—and sell only as much as you might need in the short-term, allowing the rest to compound into the future.
The Simple Four-Step Winning Investment Strategy
Want to build wealth without unnecessary stress? Learn more about managing investment risk here. And you just have to keep it simple:
- ✔️ Step 1: Invest across different account types for tax diversification and liquidity needs (including traditional retirement, Roth retirement, and brokerage accounts).
- ✔️ Step 2: Set up a diversified investment portfolio within each account that matches your goals and time horizon for when you may need the money.
- ✔️ Step 3: Automate your investments like clockwork—and as frequently as you can—whether the market is soaring or crashing.
- ✔️ Step 4: Ensure you always maintain ample cash reserves to last you at least 3-6 months of living expenses so you can tune out the market noise and not be forced to sell investments at a bad time.
Then? Leave your investments alone until you actually need the funds—and focus on playing your other Smart Cards™ right along the way.
Final Thoughts: Invest Smarter, Not Just for Retirement
Building wealth isn’t just about getting tax perks from retirement accounts. It’s about making sure your money is accessible when you need it, without unnecessary restrictions.
A brokerage account gives you:
- ✔️ More financial flexibility
- ✔️ Less tax uncertainty
- ✔️ Freedom to access money before retirement age
Invest wisely. Don’t lock up all your wealth in retirement accounts—play your non-retirement investment card just as strategically! 🚀
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Non-Retirement Investments