401(k) vs. Roth IRA vs. Brokerage Account

What's Actually Right for Your Goals?

If you've ever Googled "where should I put my money," you know the answer is rarely simple. Financial content is full of conflicting advice -- "max out your 401(k) first," "no, do the Roth IRA," "actually, a brokerage is more flexible." The truth? All three accounts have a purpose. The right answer depends on who you are, what you earn, and what you're building toward.

Let's break each one down -- in plain language -- so you can make a smarter decision with your money.

First, Understand the Core Difference: Taxes

Before comparing accounts, you need to understand one foundational idea: all three of these accounts treat taxes differently. That difference determines almost everything.

Here's a simple mental model:

• 401(k) -- You invest pre-tax dollars now, pay taxes later when you withdraw.
• Roth IRA -- You invest after-tax dollars now, pay nothing when you withdraw.
• Brokerage Account -- No special tax rules. You pay taxes along the way on gains and dividends.

Each account has trade-offs. Let's go deeper.

The 401(k): Your Workplace Workhorse

A 401(k) is an employer-sponsored retirement account. You contribute money directly from your paycheck before taxes are taken out, which reduces your taxable income today. If your employer offers a match, that's essentially free money -- and one of the best guaranteed returns in personal finance.

Example: Say you earn $80,000 per year and contribute $8,000 to your 401(k). The IRS only sees $72,000 of taxable income. That tax break happens immediately, in the current year.

In 2024, you can contribute up to $23,000 per year ($30,500 if you're 50 or older). The downside? Your money is locked in until age 59.5 -- withdraw early and you'll face taxes plus a 10% penalty.

The Roth IRA: The Long Game Tax Shelter

A Roth IRA flips the 401(k) model. You contribute money you've already paid taxes on, and in exchange, all your growth -- everything your investments earn over decades -- comes out completely tax-free in retirement.

Example: You invest $6,500 into a Roth IRA at age 30. Over 35 years, that grows to $80,000. You pay zero taxes on the $73,500 in gains when you withdraw it at 65.

The Roth IRA contribution limit in 2024 is $7,000 per year ($8,000 if you're 50+). There's a catch -- if you earn over $161,000 as a single filer (or $240,000 married filing jointly), you can't contribute directly. There are workarounds, such as the "backdoor Roth" strategy, but those require careful planning.

The Brokerage Account: Flexibility Without the Rules

A brokerage account is the most straightforward of the three. There are no contribution limits, no income restrictions, and no age-based withdrawal rules. You can invest in virtually anything -- stocks, ETFs, bonds, mutual funds -- and sell whenever you want.

The trade-off is taxes. You'll pay capital gains tax when you sell investments for a profit, and you may owe taxes on dividends each year. Long-term capital gains rates (for assets held over one year) are generally lower than ordinary income tax rates, but there's no tax shelter like you get with retirement accounts.

Example: You invest $20,000 in a brokerage account and sell five years later for $35,000. You'll owe capital gains tax on the $15,000 profit. The rate depends on your income -- most people pay 15%.

So, Which One Should You Choose?

The most honest answer is: probably more than one. Most people benefit from using multiple accounts in a coordinated strategy. But if you're trying to prioritize, here's a simple framework to think through:

• Step 1 - Get your employer match first. If your company matches 401(k) contributions, always contribute at least enough to capture the full match before doing anything else. It's an instant 50-100% return.
• Step 2 - Consider a Roth IRA next. If you're eligible, the tax-free growth of a Roth IRA is powerful over a long time horizon. Fund it up to the annual limit.
• Step 3 - Go back to the 401(k). After maxing the Roth, return to your 401(k) and increase contributions to reduce more taxable income.
• Step 4 - Open a brokerage account. Once you're maxing out retirement accounts, a taxable brokerage account gives you an additional flexible investment vehicle with no caps.
  
  

The Bottom Line

There's no one-size-fits-all answer when it comes to these three accounts -- but there is a right answer for your specific income, tax situation, and goals. The biggest mistake most people make isn't choosing the "wrong" account. It's waiting too long to start because the decision feels complicated.

Start where you are. Take advantage of free money first. Build from there.