I was thinking about this the other day and forgot my lack of knowledge, I am not a finance person by any means. Why is it beneficial to put money in IRAs and HSAs and even 401ks over a brokerage acct when you can make similar investments? The brokerage acct the money stays liquid, correct? So if one will need it for whatever reason before retirement like buying house, medical bills, etc they can withdraw without the penalties of the typical retirement accts. I’d love to know why it’s throwing: 401k to match, then HSA, then IRAs, then brokerage acct. thanks!
Why should one invest in HSAs and IRAs over a brokerage acct?
byu/beanman214 inpersonalfinance
Posted by beanman214
6 Comments
Well, the 401k and HSA are tax advantage accounts, so there is that for starters. Also, because they’re illiquid, you’re less likely to, you know, withdraw and spend that money and actually use it for it’s intended purpose, retirement. Most people suck with money and if given the option to spend it, they will, so those types of accounts keep people from blowing through their savings easily.
Because you’ll pay less taxes over time.
401k = free money from employer match and tax advantaged growth, HSA = free money from triple tax advantage, Roth = free money from tax advantaged growth. If you aren’t investing in those first you’re rejecting free money. Absolutely you want the brokerage account for the liquidity but not before you fill the free money accounts first.
401k – tax benefit today (pre), match, loan options (potentially)
Roth IRA – no capital gains compared to brokerage
HSA – pre tax contribution, tax deferred growth, tax free proceeds
The main answer is taxes, each are slightly different liquidity and purpose.
Taxes. Retirement, HSA, 529, etc… are all about saving on taxes. The more you save on taxes, the more you have to invest.
With an account like an HSA, you get a deduction on what you contribute, any gains within the account are tax deferred, and then if you withdraw for medical theres no tax. Thats triple tax-advantaged!
With a Traditional 401k, you have $23.5k you can contribute every year. Most employers offer a match to a certain amount, that’s free money! But at the core, thats $23.5k that you can reduce your income by, to reduce your income tax! Thats HUGE! That can be enough to drop a bracket depending on your income!
With a Roth 401k or IRA, you don’t get a deduction, but all money you withdraw in retirement is 100% tax free!
A regular brokerage will be more liquid, yes. But you will pay taxes on your gains/dividends every year. There is no tax savings whatsoever (not counting short vs long term capital gains).
So the idea is to contribute to your retirement accounts as much as you can, and ALSO invest in a brokerage. Then you have both.
The more money you make, the easier it is to max all your accounts and also have even more available to invest. But you do what you can with whatever income you have.
>Why is it beneficial to put money in IRAs and HSAs and even 401ks over a brokerage acct when you can make similar investments?
Because you will pay less tax overall with the former than the latter.
>The brokerage acct the money stays liquid, correct?
“Able to access without age-related penalties” is a more appropriate description of taxable brokerages.
>So if one will need it for whatever reason before retirement like buying house, medical bills, etc they can withdraw without the penalties of the typical retirement accts.
If your goal is to save for a house or similar large goal, then yes you should use a taxable brokerage rather than a retirement account.
Also keep in mind that the nominal purpose of an HSA is to pay medical bills. There are no penalties to use one for them.
>I’d love to know why it’s throwing: 401k to match, then HSA, then IRAs, then brokerage acct. thanks!
Because a 401k match is an instant 100% return on your investment, which is an unbeatable return.
After that, HSAs are the most tax advantage account type.
Finally, funding your retirement is critical, so contributing enough to a 401k/IRA comes next.
If you have money left over after all of that, *only then* should you invest in a less tax-efficient taxable brokerage.