I Won’t Be Making This One $11,000 Mistake Again in 2024

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Missing out on tax breaks can cost you five figures. Find out how one mistake could cost me over $11,000. 

I did all the right things, or so I thought. I spent low and saved high. By the end of this year, I’d have invested more than $6,500 into my brokerage account toward retirement. My totally normal, 100% taxable brokerage account. (Did I mention taxable? It’s worth repeating.)

Turns out, I’ve been missing out on a one-of-a-kind investment opportunity. The tax-free kind. In fact, there’s a special brokerage account you can use to save toward retirement called an individual retirement account (IRA). With IRAs, you get special tax privileges.

The catch is you’ve got to leave profits in the account until you retire, with a few exceptions. And you’ve got to take advantage of it. Which brings me to the one $11,000 mistake I won’t be making again in 2024.

The $11,000 mistake

Here’s the thing: I could be saving my future self a lot more money by investing in a Roth IRA.

The opportunity cost of investing in a regular brokerage account instead of maxing out my Roth IRA is $11,000. To reach that number, I started with the $6,500 IRA contribution limit, assumed a conservative average annual return of 6.5%, and assumed an investment horizon of 40 years.

Here’s about how much money I’d get after withdrawing from each account in 40 years:

Individual retirement account (Roth IRA): $80,704.48Regular brokerage account: $69,573.81

Why the regular brokerage account number is smaller: Retirees pay a capital gains tax when withdrawing funds from a regular brokerage account. For the purposes of this example, I assumed I’d be taxed 15% of profits, a fairly common rate for earners in my income bracket.

Math behind regular brokerage account calculation: I took the compound investment total of $80,704.48 and subtracted the initial $6,500 deposit to calculate my profits: $74,204.48. From that I subtracted a 15% capital gains tax ($11,130.67) to calculate post-tax profits: $63,073.81. I added the $6,500 initial deposit to my $63,073.81 post-tax profits to calculate my total withdrawal amount: $69,573.81. After taxes, I’d get just $69,573.81 from my regular brokerage account.

Retirees do not pay capital gains tax when withdrawing funds from a Roth IRA. That’s one big reason why investing in a Roth IRA can save you thousands of dollars.

What will be different in 2024

I’ll be maxing out my Roth IRA in 2024 to eliminate that $11,000 opportunity cost.

The maximum amount you can contribute to an IRA is rising from $6,500 to $7,000 in 2024, so the opportunity cost of investing in a taxable brokerage account will be even higher. I think I’ll pass on making the same mistake two years in a row, thank you very much.

Losing out on easy tax breaks sucks. But it’s fixable. And the solution is straightforward: Use tax-advantaged retirement accounts while you can and when it makes sense. It can seem like a small, insignificant thing — and end up saving you $11,000.

One $1,000 caveat

Failing to use an IRA wasn’t my first investing mistake; not even close. After the 2020 stock market crash, I dabbled in margin investing — borrowing money to purchase stocks — only for the value of my holdings to plummet 50% when growth stock valuations were slashed. I needed cash to avoid getting called on margin, so I made the mistake of cashing out my 401(k).

That’s the thing about retirement accounts. They’re great for one thing: retirement. Being 25 and very much employed, I was forced to pay a 10% early withdrawal fee and lost my retirement account tax advantages. Of the $5,000 I withdrew, I ended up with less than $4,000. Months of contributions, gone, just like that. Staring at my account balance, I was flabbergasted.

IRAs are great if and only if you respect the spirit of the investment. Early withdrawals may cost you — it only takes you one minute of poor decision-making to lose 20% of your retirement savings. It’s also the sort of lesson you only need to learn once.

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