Should You Only Save in a Taxable Brokerage Account if You Intend to Retire Early?

Many people dream of being able to retire early. And while it’s something you definitely have to work and save for, with the right strategy, it can be done.

If you know for a fact that you want to retire early, then you’ll need to house retirement savings in an account that makes that possible. But does that mean sticking to a taxable brokerage account alone?

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You don’t want to give up those tax breaks completely

The upside of saving for retirement in a taxable brokerage account is having unrestricted access to your money. Want to cash out investments to the tune of $40,000 at age 50 to buy a boat? Go ahead. You may be looking at some capital gains taxes, but there’s certainly no IRS penalty involved.

On the other hand, with an IRA or 401(k) plan, you will be looking at an early withdrawal penalty for removing funds prior to age 59 1/2 unless you qualify for a limited exception. So, while these plans are loaded with tax benefits, they make it difficult to pull off retirement prior to age 59 1/2.

With a taxable brokerage account, there are no tax breaks, but there’s freedom. So, it’s definitely wise to keep a nice amount of money in a taxable brokerage account if you know for sure that early retirement is something you want to pursue. But that doesn’t mean you shouldn’t save for retirement in an IRA or 401(k) at all.

While it’s true that taxable brokerage accounts don’t have an annual contribution limit, if you’re in a position to be saving many thousands of dollars a year for retirement, then it pays to keep a chunk of your money in an IRA or 401(k) for the tax benefits alone. The reason?

You may not be old enough to tap an IRA or 401(k) penalty-free when you first retire. But you’ll be 59 1/2 eventually. From there, you can take withdrawals from one of these plans without having to worry about unwanted financial repercussions.

It pays to save in an HSA, too

It’s not just an IRA or 401(k) to consider funding if you’re hoping for an early retirement. You should also make a point of contributing money to an HSA if your health insurance plan allows you to do that.

Unlike IRAs and 401(k)s, HSAs don’t impose penalties for early withdrawals. In fact, with an HSA, there’s no such thing as an early withdrawal because you can remove funds penalty-free at any age to pay for qualified medical expenses. So if you retire at, say, age 51, you’d be able to use your HSA to cover medical bills that arise.

The only penalties that come into play with an HSA are those related to non-medical withdrawals. And those are waived once you turn 65.

If you know that early retirement is something you want, then it certainly pays to have unrestricted funds in a taxable brokerage account. But don’t make that the only account you save and invest in. There’s no reason to deny yourself a host of tax benefits when you’re going to be able to use an IRA, 401(k), or HSA eventually.