Which account to put your money for retirement?

To maximize periodic withdrawals during retirement, choosing between a Traditional 401(k) (including IRA), Roth 401(k), and a trading (brokerage) account depends on several key factors:

1. Current Tax Rate on Salary (when you contribute) vs. Future Tax Rate on Withdrawal (when you take the money out)

   • Traditional 401K: Contributions are tax-deductible now. If you're in a higher tax bracket today than you expect to be in retirement, meaning your current salary is higher than your future annual withdrawals, you get a larger tax break today and you should put the money in pre-tax accounts.
   • Roth 401K: Contributions are made with after-tax dollars, so there's no immediate deduction. If you're in a lower tax bracket today, it's less costly to contribute now and enjoy tax-free withdrawals later.
   • Trading Account: There's no tax benefit when contributing. Contributions are after-tax, just like Roth.

   Rule of thumb: If your current tax rate is higher than what you expect in retirement, a Traditional 401(k) may be more advantageous. If your current tax rate is lower, a Roth 401(k) or trading account could be more favorable.

2. Investment Yield (How much your investments grow)

   • Traditional & Roth 401K: You are usually limited to a selection of mutual funds or company stock. Some funds track indices (e.g., the S&P 500) and have low fees, while others are actively managed and cost more. Some plans allow individual stock investments but may charge additional fees.
   • Trading Account: Trading accounts typically offer greater flexibility and access to a broader range of investment options—stocks, bonds, ETFs, mutual funds, cryptocurrencies, CDs, or even your own business. This gives you more control and potential for higher returns.

   Rule of thumb: If you value flexibility, higher growth potential, and liquidity (e.g., for emergencies), a trading account may suit you better. If you prefer stability, professionally managed funds, and protection from emotional decisions during market downturns, retirement accounts can provide a safer, more uninterrupted environment for long-term gains.

3. Tax on Investment Growth

   • Traditional 401K: Investment gains (interest, dividends, capital gains) are tax-deferred. However, all withdrawals, both contributions and investment gains, are taxed as regular income.
   • Roth 401K: Growth is tax-free and withdrawals are also tax-free, assuming you follow IRS rules. However, you can't deduct losses annually. To claim a loss, you'd have to close and fully withdraw from all Roth accounts, and only if your total distributions are less than your total contributions.
   • Trading Account: Earnings like interest and dividends are typically taxed in the year received. You pay capital gains tax (usually 0 - 20%) when you sell assets at a profit. Capital losses can be used to offset gains or deducted from ordinary income (within limits).

   Rule of thumb: While Roth accounts offer superior tax advantages for long-term growth, Trading accounts may offer more tax flexibility, especially when managing gains and losses year to year.