Should You Max Out Your 401(k) or Invest in a Brokerage?
It is one of the most common FI questions. Should you max out your 401(k) or put extra money into a taxable brokerage account? The answer is not always straightforward, and it can decide how flexible and tax efficient your plan feels once you start living off it.
Before diving deeper, here is a quick reminder on the Investing Order for FI guide. This order isn’t one-size-fits-all, but it gives you a flexible roadmap for balancing tax advantages, liquidity, and growth potential.
Understanding what you are really choosing
At its core, this is not just about where you invest. It is about when and how you want to access that money and what tradeoffs you are willing to make along the way. Each account type plays a different role, and the right mix changes as your FI journey evolves.
- 401(k) or Traditional IRA: Tax-deferred today, taxed later. Helpful for lowering current income, with access restrictions before age 59½. That is not always a barrier. For most of your journey it is still one of the best levers you can pull.
- Roth IRA or Roth 401(k): Pay taxes now and withdraw tax-free later. Contributions, not earnings, can usually be accessed early. This can be a big advantage if you plan to tap your portfolio before traditional retirement age.
- Taxable Brokerage: No tax break up front, full flexibility later. You can invest, withdraw, or rebalance anytime. Taxes matter here, so learn how to harvest gains, offset losses, and manage your bracket so you pay your fair share and nothing more.
The case for maxing your 401(k)
When your income is high, a 401(k) is a powerful tool. Every pre-tax dollar lowers your taxable income now and compounds for decades. If your employer offers a match, that is an instant, risk-free return and part of your compensation. The tax savings can also be redirected. If maxing your 401(k) saves you $5,000 in taxes, that cash can fund a Roth IRA, cover insurance premiums, or bolster your emergency fund.
Pro tip: If you are in the 22–32% federal bracket, every $1 invested pre-tax can save roughly 25–35 cents in taxes now. That is real leverage.
Trade-off: Access.
Funds are harder to touch before age 59½ and may face a 10% early withdrawal penalty. Several penalty-free exceptions exist, including the Rule of 55, SEPP under Rule 72(t), qualified emergencies, and disability. Rolling an old 401(k) to an IRA can also open limited penalty exceptions, such as the $10,000 first-home allowance.
When to prioritize an IRA
After you capture the full employer match, or if your company does not offer one, an IRA can be the ideal next step. You might prioritize an IRA if your 401(k) fees are high, you want broader fund choices, you expect a higher tax bracket later and prefer Roth, or you want flexible access to Roth contributions.
The case for investing in a brokerage
Flexibility is one of the most underrated assets in any FI plan. A brokerage account gives you full control. You can withdraw funds anytime for a home purchase, a sabbatical, or to bridge early retirement years before age 59½. Brokerage accounts also enable strong tax planning in early FI. If you live mostly off long-term capital gains, you may qualify for the 0% capital gains bracket, which can allow tax-free withdrawals if your taxable income is low enough.
FlexFI takeaway: Liquidity is its own kind of security. You cannot spend tax deferral if your money is locked up for 20 years.
How they can work together
The best FI strategies diversify not only across investments but across tax treatments. Think of it as balancing growth and control.
- 401(k): Save on taxes now and pay later when income is lower.
- Roth IRA: Pay taxes now and withdraw tax-free later.
- Brokerage: Pay modest taxes as you go and maintain full liquidity.
Each account is a different time machine for your money. It sets when you benefit and how much control you have over future withdrawals.
| Account Type | Primary Benefit | Access Before 59½ |
|---|---|---|
| 401(k) / Traditional IRA | Current tax deduction and long compounding | Limited, with specific exceptions |
| Roth IRA / Roth 401(k) | Tax-free withdrawals later | Roth contributions generally accessible |
| Taxable Brokerage | Total flexibility and tax planning options | Fully accessible anytime |
How to decide what is right for you
- Need flexibility soon? Early retirement, travel, or a sabbatical → brokerage contributions.
- In a high tax bracket now? → Max a 401(k) or traditional IRA.
- Expect higher taxes later? → Favor Roth or brokerage.
- Want balance and simplicity? → Split surplus roughly 70/30 between tax-deferred and taxable.
Bottom line
There is no one-size-fits-all answer. The smart approach usually blends pre-tax, Roth, and taxable accounts in proportions that give you both growth and freedom. The goal isn’t just to build wealth. It’s to build options.
Before you auto-pilot into maxing a 401(k), take a few minutes to run your own numbers and review the Investing Order for FI. Small contribution shifts can make your plan more flexible.