Here’s What Happens When All of Your Investments Are in an IRA

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An IRA is a great home for your retirement savings. But read on to see why it could pay to also invest outside of one. 

IRAs have long been a popular retirement savings tool. And as of the first quarter of 2023, the average IRA balance was $109,000, according to Fidelity.

There are many benefits to funding an IRA. For one thing, traditional IRA contributions go in tax-free, so they shield a portion of your income from the IRS. Plus, investment gains in an IRA are tax-deferred, so you don’t have to deal with taxes until you’re ready to take withdrawals.

There are benefits to keeping all of your investments in an IRA. But here’s why you might also want to open a regular brokerage account, too.

When you want more options with your money

A big advantage of keeping all of your investments in an IRA is getting to enjoy tax-advantaged growth. But more so than that, having that money earmarked for retirement could make it less likely that you’ll take a withdrawal prematurely.

After all, you know that an IRA stands for “individual retirement account.” And that fact alone might help you stick to your long-term plan and avoid cashing out investments along the way.

But keeping all of your investments in an IRA also has some drawbacks. Because IRAs give you tax breaks, you’re required to leave your money alone until age 59 1/2. If you withdraw funds before that age, you risk a 10% penalty.

Now, there are a few exceptions to this rule. You’re allowed to take a penalty-free IRA withdrawal prior to age 59 1/2 to buy a first-time home. And you can also withdraw funds penalty-free to pay for college.

But otherwise, that money needs to stay in your IRA until 59 1/2 if you don’t want to face a penalty. And while that may not be problematic if you’re aiming to retire in your 60s, you may decide that you want to retire earlier.

In fact, what if you do a great job of saving and investing so that by age 55, you have $2 million? You may decide that’s enough money to live on and wrap up your career ahead of schedule. Only if all of your investments are in an IRA, you won’t be able to touch that money without a penalty for another four years and change.

It also might be the case that you don’t want to retire early, but rather, are forced to. Your industry might suffer a setback that makes it impossible for you to find work at age 57. At that point, do you really want to force yourself to work any job you can get for two years or more simply because you can’t access your retirement savings yet?

That’s why it could pay to keep some investments in a taxable brokerage account on top of an IRA. Doing so gives you more leeway with that portion of your assets.

Don’t back yourself into a corner with your retirement assets

Keeping all of your investments in an IRA could mean running into issues when you need access to money sooner than what these accounts allow for. So while it certainly pays to max out an IRA every year if you can, it’s also smart to put at least a small sum of money into a regular brokerage account.

It could be as little as $300 or $400 a year. But that way, you’ll have some assets you can cash out at any point without having to worry about penalties.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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