401(k) vs Brokerage: Where to Put Your Next Dollar
A $2.4M 401(k) sounds like a win — until RMDs force $90,000+ yearly withdrawals that push you into a higher tax bracket and trigger Medicare surcharges.
Sarah did everything right. Maxed out her 401(k) every year for two decades on a $95,000 salary. And it's about to cost her thousands in taxes she never planned for. By 73, her $2.4 million balance triggers Required Minimum Distributions (RMDs) — forced withdrawals of $90,000+ per year. That's nearly her working salary, taxed as ordinary income. It pushes her from the 22% bracket into the 24% bracket. Stack Social Security on top, and she's staring at Medicare surcharges she never saw coming.
Sarah's mistake wasn't saving. It was putting every dollar in the same bucket.
Quick Answer:
- At $60K: Contribute enough to get the employer match, then fund a Roth individual retirement account (IRA). - At $95K: Max 401(k) only if your employer matches. Otherwise, split between brokerage and Roth IRA. - At $150K+: Use the mega backdoor Roth if available; otherwise, shift new savings to brokerage. - At $250K+: Most new dollars go to brokerage — 401(k) RMDs could push you into the 32% bracket.
Key Takeaways
1. Employer match is free money — always capture it first. 2. Maxing out a 401(k) at high incomes can create an RMD trap in retirement. 3. The mega backdoor Roth lets high earners convert up to $46,500 in after-tax 401(k) contributions (minus any employer match) to Roth, bypassing income limits. 4. Bonds and tax-inefficient assets belong in 401(k)s; equities and index funds go in brokerage.
401(k) vs Brokerage: The Quick-Reference Table
| Feature | 401(k) | Brokerage Account |
|---|---|---|
| Tax Treatment | Pre-tax contributions; taxable at withdrawal | After-tax contributions; taxable gains |
| Employer Match | Yes (voluntary, employer-dependent) | No |
| Contribution Limit (2025) | $23,500 ($31,000 with catch-up for ages 50–59 and 64+; $34,750 for ages 60–63 under SECURE 2.0's super catch-up provision) | Unlimited |
| Early Withdrawal Penalty | 10% before 59½ | No penalty |
| Investment Flexibility | Limited (10–30 funds) | Full market access |
| RMDs at 73 | Yes | No |
| Ideal For | Low-to-mid income earners with match | High earners and taxable investments |
The Tax Math That Changes Everything
A 401(k) cuts your tax bill today. A brokerage account lets your money grow without locking it behind withdrawal rules until 59½. The right split hinges on one question: will you pay more in taxes now, or in retirement?
Recommended reading: Limited
Example: The $60K Scenario
- 401(k) contribution: $23,500 pre-tax → reduces taxable income to $36,500. - Tax savings now: At 12% marginal rate, you save $2,820 in taxes. - Retirement withdrawal: Assume $2.4M at 65, with RMDs starting at $94,340/year. At 24% tax rate, you'll pay $22,642 annually on what you thought was a "tax-deferred" account.
A reality check: contributing $23,500 on a $60,000 salary means saving 39% of gross income. Most people at this income can't swing that. If you can only contribute 10–15%, grab the full employer match first, then redirect the rest to a Roth IRA where withdrawals are tax-free.
Verdict: If your retirement tax rate mirrors your current rate, a 401(k) is a wash. The real win comes from the employer match — not the deferral itself. No stock, bond, or real estate deal can promise that kind of return. (Current caps on what you can defer: see Canopy Press's 2016–2026 contribution-limit history.)
Example: $95K Salary
- $5,700 match (6%) = free $5,700. - Opportunity cost of skipping it: You'd need to earn 10% annually in a brokerage account to match that return.
The average 401(k) balance for workers aged 55–64 is $232,379 — but the median is just $71,168, meaning half of workers have less than that saved, according to Fidelity data. That gap between average and median reveals how skewed the distribution is, which makes capturing every match dollar even more critical.
Who Should Skip It?
Those who genuinely can't afford the contribution. If paying rent requires every dollar, the match isn't free — it's a forced tradeoff against immediate needs.
Contribution Limits: The $23,500 Cap vs. Unlimited Brokerage
The 2025 401(k) limit of $23,500 is a ceiling. Your brokerage account has none. For high earners, this gap creates a critical decision point.
Example: $250K Salary
- Maxing out a 401(k) saves $5,640 in taxes at the 24% marginal rate — but only if you expect a lower rate in retirement. - Allocating to a brokerage allows tax-efficient growth. Holding index funds like FZROX (0% expense ratio) in a taxable account avoids RMDs entirely and gives you full liquidity.
The RMD Trap: Why Overfunding a 401(k) Can Cost You
Required Minimum Distributions start at 73 (75 for those born in 1960+). The IRS uses the Uniform Lifetime Table to calculate them:
Example: $2.4M at 73
- Divisor: 26.5 (from IRS Table III)
- RMD: $2.4M ÷ 26.5 = $90,566 per year.
If you're in the 22% bracket ($48,476–$103,350), that alone pushes you into the 24% bracket. Worse, Social Security or pension income stacking on top can trigger Medicare Part B and Part D surcharges — an extra $1,000–$5,000/year that nobody budgets for.
Remember Sarah? She could sidestep this entire problem by shifting new savings to a brokerage account today. No RMDs. No forced withdrawals. She sells when she wants — not when the IRS tells her to.
Verdict: High earners should cap 401(k) contributions where RMDs would push them into higher brackets. For $250K+ earners, that often means redirecting new savings to brokerage.
The Income Ladder: Where Your Next Dollar Goes
| Income Level | Priority Order | Watch Out For |
|---|---|---|
| $60K | Match → Roth IRA → brokerage | Keep 401(k) contributions realistic for your budget |
| $95K | Match → max 401(k) if matched → Roth IRA | If no match, split between Roth IRA and brokerage |
| $150K | Match → mega backdoor Roth → brokerage | Roth IRA phase-out starts at $150K single / $236K married filing jointly (2025, per IRS guidelines) |
| $250K | Match only → brokerage | RMDs may push into 32% bracket |
| $500K | Match only → brokerage | Avoid additional pre-tax contributions beyond match |
Example: $150K and the Mega Backdoor Roth
If your 401(k) allows after-tax contributions, you can contribute up to $46,500 beyond the $23,500 pre-tax limit (the total 401(k) limit is $70,000 for 2025, per IRS guidelines), then convert it to Roth. This bypasses Roth IRA income limits and unlocks tax-free growth. Only about 12% of 401(k) plans offer this option — verify the current figure with your plan's Summary Plan Description or HR — check your Summary Plan Description or ask HR.
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Asset Location: Bonds in 401(k)s, Equities in Brokerage
Most people obsess over what to buy. Fewer think about where to hold it — and that's the mistake. Bonds and real estate investment trusts generate ordinary income, taxed at your full rate. Index funds and long-term stock holdings? Mostly long-term capital gains, taxed at just 0 to 20%.
Example: $500K Portfolio, 60/40 Split, 30-Year Horizon
- Strategy A (random placement): $300K stocks and $200K bonds split evenly across 401(k) and brokerage. Bonds in brokerage throw off $8,000/year in interest taxed at 24% = $1,920/year in drag. - Strategy B (optimized): All $200K bonds in the 401(k) (tax-deferred), all $300K stocks in brokerage (long-term gains taxed at 15%). Annual tax savings: ~$1,400/year.
Over 30 years at 7% growth, that $1,400/year difference compounds to roughly $132,000 in additional after-tax wealth. Same investments. Only the placement changed.
Verdict: Who Should Use What?
- Use 401(k) if:
-
You get an employer match. - Your income is under $150K (single) or $236K (married filing jointly) and you qualify for a Roth IRA alongside it. - You want to shelter bond income from taxes.
-
Use Brokerage if:
-
You earn $150K+ and are phased out of Roth IRA. - You want full control over investments — individual stocks, real estate investment trusts (REITs), sector exchange-traded funds (ETFs). - You want to avoid RMDs entirely.
-
Avoid 401(k) if:
-
You might need cash before 59½. - Your plan has high fees (e.g., 1.5% expense ratio).
-
Avoid Brokerage if:
- You're eligible for a Roth IRA and haven't maxed it out yet. - You hold high-turnover, tax-inefficient funds that would generate annual taxable events.
Frequently Asked Questions
Should I prioritize 401(k) or brokerage if I have no employer match?
Without a match, the 401(k) loses its biggest advantage. Prioritize a Roth IRA first (if you qualify), then brokerage. The 401(k) still makes sense for high earners who want the tax deduction, but weigh it against the RMD implications above.
What's the best way to handle RMDs?
Convert some 401(k) funds to Roth between retirement and age 73 — a strategy called Roth conversion laddering. You'll pay taxes on the conversion now at a potentially lower rate, shrinking the balance subject to mandatory withdrawals later.
How do I know if my 401(k) allows the mega backdoor Roth?
Look for "after-tax contributions" (distinct from Roth 401(k) contributions) in your plan's Summary Plan Description. You can also call your plan administrator directly. Only about 12% of plans currently support this, so don't assume yours does.
Can I lose money in a brokerage account?
Yes — and you can lose money inside a 401(k) too, since both hold the same types of investments (stocks, bonds, funds). The difference is how losses are treated: brokerage accounts let you harvest losses for a tax deduction (up to $3,000/year against ordinary income), while 401(k)s don't. In either account, you only realize a loss when you sell.
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Found an error? At Canopy Press, accuracy comes first. If you spot a claim that needs checking, let us know at [email protected] — we'll verify and correct it immediately.
Found an error? At Canopy Press, accuracy comes first. If you spot a claim that needs checking, let us know at [email protected] — we'll verify and correct it immediately.
Sources
- Perplexity source 1
- Perplexity source 2
- Perplexity source 3
- Perplexity source 4
- Perplexity source 5
- Contribute To My 401k Or Invest In An After-Tax Brokerage Account?
- 401(k) vs. Brokerage Account: Which One is Better For You?
- When to use a taxable brokerage account
- Can a Taxable Account Beat a 401(k)?
- IRS Notice 2024-80
