401k vs Brokerage Account: Which Retirement Withdrawal Strategy Wins?


So you’ve spent decades saving and investing for retirement, building up balances in your 401(k) and brokerage accounts. Now that you’re ready to start withdrawing money from those accounts, an important question comes up: which account should you tap first for retirement income? This decision can have major tax implications and determine how long your nest egg lasts. Do you go for the tax-advantaged 401(k) first or dip into your brokerage account? The answer depends on several factors like your tax bracket, account balances, and retirement expenses. This article compares withdrawing from 401k vs brokerage account to help determine the best sequence for you. By the end, you’ll have a tailored plan for maximizing your retirement income and making your hard-earned money last as long as possible. Let’s dive in!


Tax Implications of 401(k) vs. Brokerage Withdrawals


A 401(k) and brokerage account are two common ways to save and invest for retirement, but they have some key differences.


Contribution Limits


With a 401(k), you can contribute up to $19,500 per year in 2021, plus an additional $6,500 catch-up if you’re 50 or older. Brokerage accounts have no contribution limits, so you can put in as much as you want.


Tax Treatment


Contributions to a traditional 401(k) are tax-deductible, while those to a Roth 401(k) or brokerage account are made with after-tax dollars. Withdrawals from a traditional 401(k) and brokerage account are taxed at your income rate, while qualified withdrawals from a Roth 401(k) are tax-free.


Investment Options


401(k)s typically limit you to a set of mutual funds and ETFs chosen by your employer. Brokerage accounts offer virtually unlimited investment choices like stocks, bonds, options, and more.




Withdrawals from a 401(k) before age 59 1/2 incur a 10% early withdrawal penalty, except for certain exceptions.  Brokerage account withdrawals have no penalties regardless of your age.


Required Minimum Distributions


You must start taking taxable required minimum distributions (RMDs) from a 401(k) at age 72. Brokerage accounts have no RMDs, so your money can stay invested as long as you like.


In summary, 401(k)s and brokerage accounts each have advantages for retirement saving and income. The right choice for you depends on your priorities like taxes, investment control, and withdrawal flexibility. Why not consider using both?


Required Minimum Distributions: When 401(k) Withdrawals Become Mandatory


When it comes time to tap into your retirement funds, the tax implications of withdrawing from a 401(k) vs. a brokerage account can  make a big difference in how much you end up with.


If you withdraw money from your 401(k) before age 59 1/2, you’ll typically face an early withdrawal penalty of 10% on top of the income taxes you owe. After age 72, you’re required to take minimum distributions (RMDs) from your 401(k) each year, and those withdrawals are taxed as ordinary income.


With a brokerage account, on the other hand, you can withdraw money at any time without penalty. Long-term capital gains taxes, which are typically lower than income tax rates, will apply only to the amount your investments have earned. You can also choose which investments to sell and when, allowing you to potentially manage your tax burden.


Another factor to consider is that 401(k) withdrawals can push you into a higher tax bracket. If you withdraw a large lump sum, the additional income may mean higher taxes on your Social Security benefits as well. With a brokerage account, you have more flexibility to spread out withdrawals over time to avoid bracket creep.


In the end, the best approach depends on your financial situation and needs in retirement. But by understanding the tax implications upfront, you can make the choice that allows your hard-earned money to last as long as possible.


401(k) vs Brokerage: Which Account Should You Draw From First in Retirement?


When determining how much to withdraw from your retirement accounts each year, the withdrawal rate is one of the most important factors to consider. Set it too high, and you risk depleting your nest egg too quickly. Set it too low, and you may miss out on enjoying your hard-earned money during retirement.


Review and adjust your withdrawal rate annually based on your accounts’ performance and balances. Finding the “sweet spot” for your situation will help ensure your nest egg lasts throughout a long, enjoyable retirement.