Retirement accounts come with valuable tax advantages and other perks (such as exclusion from college financial aid calculations). That means it's usually good to put as much money in those accounts as you can.
But there are times when it might not make sense to contribute to a retirement account. Here are some common reasons that people reasonably decide to save in a brokerage account for a few years, rather than maximizing retirement account contributions.
You have a crappy retirement plan and conclude it's just not worth it
Sometimes a retirement plan is so bad that you conclude it's just not worth it to save for the unmatched portion:
- * Maybe you realize that your Roth IRA is a much better deal for you, and you prioritize that over your workplace plan
- * Maybe you decide that between sky-high fees and poor investment choices in your workplace retirement plan and the fact that your 401k will be taxed as income (rather than long-term capital gains, which would apply to many investments held for over a year in a brokerage account), that a brokerage account is simply the value-maximizing choice for you
Before making this call, be sure to read "Is Your Retirement Plan Crappy?" so you can make an informed decision.
Saving for a Down Payment
Be careful about making "big ticket" purchases that leave room for retirement savings, but sometimes "life happens" and there is a near-term need to turbo-charge your savings for a particular home purchase goal over the next several years.
You might mentally earmark some of those savings for retirement, but recognize that you'll need the cash for pre-retirement goals.
Example: Say you're expecting twins and you know that soon your 1 bedroom apartment will feel like "rats in a box". You've done a good job saving for retirement so far. But now you conclude that a move to a 5 bedroom in the 'burbs is right for your growing family, and realize that to purchase in your desired school district, you need a much bigger down payment than you have saved in your brokerage account.
You want to be out of your 1 bedroom in 2 years, max. You view this 5 bedroom house in the 'burbs as a place to raise your kids, but want to downsize in retirement, so some of that home equity will definitely become retirement savings when your little ones have flown the coop.
Childcare is expensive. You decide that you can meet your down payment goal by cutting your workplace retirement contribution to only max out the match for the next two years, and save the difference in a brokerage account (not the unmatched portion of your workplace retirement plan).
If your desired down payment requires more than 3 years of prioritizing the house over retirement, consider whether that's really the right home for your situation and needs.
Are you eligible for a Roth IRA? Learn about how a Roth IRA lets you take back contributions without tax or penalty any time, and can be a great place to build up balances you might want access to in the near-term.
Not sure if you're eligible for a Roth IRA? Try our interactive AboveBoard Financial Action Plan.