Brokerage Over 401(k)?

Summary

Jill on Money with Jill Schlesinger

Episode: Brokerage Over 401(k)?
Date: September 10, 2025

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Brief Overview

In this episode, Jill Schlesinger and co-host Mark tackle the increasingly common question: Is funding a brokerage account sometimes better than maxing out traditional pre-tax retirement savings, like a 401(k)? Listener Pete from New York joins to share his financial situation and to ask why the hosts sometimes recommend brokerage accounts over traditional retirement vehicles—especially given his high income and the high-tax environment of New York. The episode also covers strategies around mortgage payoff, life insurance, college savings, and the importance of asset flexibility and tax treatment.

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Key Discussion Points & Insights

1. Meet Pete: The Case Study

• Profile:
  • Married, mid-40s, three kids (ages 15, 13, and 10)
  • Household income: ~$575,000
  • Home value: ~$850,000; mortgage: $330,000 (3.2% rate, 17 years left)
  • Committed saver and investor (across Roth, traditional, and brokerage accounts)
• Main Concerns:
  • Should he keep funding a SEP IRA (pre-tax) or focus on his brokerage account?
  • Wants to pay down mortgage early for peace of mind
  • Ensures college savings and estate planning are covered

2. Understanding the SEP vs. Brokerage Dilemma

• Pete’s Setup:

  • $508,000 in traditional 401(k)
  • $46,000 in Roth 401(k)
  • $58,000 in wife’s 403(b)
  • $9,000 in SEP IRA
  • $48,000 in backdoor Roths
  • $50,000 in brokerage
  • Aggressively funding 529s for kids’ college
  • Future excess cash flow: ~$30,000/year

• Why Consider Brokerage over SEP/Traditional 401(k)?

  • Ordinary Income Tax on Withdrawals:
    • “All that money that grows, that has not yet been taxed, will come out. And I bet you it's not coming out at 18 or 20%. It's just not. You're going to be at least in the 24% bracket later on in life.” (Jill, 13:10)
  • Capital Gains Advantage:
    • Withdrawals from a brokerage account are taxed at a lower long-term capital gains rate (typically 15%, plus 3.8% Medicare surtax for high earners versus 24–35% for ordinary income).
    • Quote: “I would much rather put the money into a brokerage account and pay capital gains.” (Mark, 12:03)
  • Liquidity and Flexibility:
    • Brokerage funds are liquid; offer flexibility for needs pre-retirement.
    • “I like having the access to the money and having a little bit of money that doesn't have to get tied up in a retirement account that gives you flexibility.” (Jill, 13:30)

• Jill’s Guidance:

  • Given Pete’s already sizable pre-tax assets and his high income, the marginal benefit of further pre-tax contributions is outweighed by the flexibility and favorable tax treatment of brokerage investing.

3. Mortgage Paydown Debate

• Pete’s Position:
  • Emotional desire to pay down his 3.2% mortgage faster, despite knowing the math likely isn’t optimal.
• Jill’s Response:
  • “Mathematically that is not the wisest decision...In a very conservative or balanced portfolio” you could likely beat that return. (14:08)
  • Psychology matters too: “If you want to make the—like, I am not the kind of human being who believes that everything should be optimized mathematically.” (14:22)
  • Suggests tracking returns over mortgage tenure for peace of mind.

4. Broader Investment and Wealth Inequality Themes

• Market Returns Have Driven Wealth Gaps:
  • “It's one of the reasons that helps explain how the wealth inequality has blown out...If you think about 40% of the country not owning any investment...that chasm is just massive and gets bigger and bigger. So it's not just the amount of money that I earned, but it's like I started investing 10, 15, 20 years ago.” (Jill, 17:41)
• Jill’s Advice to Newcomers:
  • Buying a house isn’t the only path to wealth—“being an investor is going to be the way to accumulate.”

5. Estate Planning and Life Insurance Checklist

• Estate Docs: Pete’s finished all estate documents including healthcare proxies.
• Life Insurance: Both spouses have significant term coverage (over $1M each) expiring at staggered intervals.
• Jill’s Emphasis: Ensuring sufficient protection for dependents remains paramount.

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Notable Quotes & Memorable Moments

• On Taxes and Account Selection:

  • Pete: "I was not getting that part. It's capital gains in the brokerage, it's ordinary income..." (12:19)
  • Jill: "Exactly, exactly..." (12:26)

• On Mortgage Psychology:

  • Jill: “Mathematically that is not the wisest decision, right.” (14:08)
  • Pete: "Yeah, no, I know...I've already paid off, I think, two years of that mortgage. I know mathematically it's bad, but it makes me feel good." (15:29)

• On Market Returns vs. Mortgage Rates:

  • Mark: “I actually looked for me personally and I looked at the last 10 years rate of return, 11.6%.” (17:25)
  • Jill: "Thank you." (17:39)

• On the Luck of Investing in the Recent Decade:

  • Jill: "Yeah, it's outrageous...We're so lucky to be investing during these years." (17:40)

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Important Timestamps

• [04:07] Pete introduces his question and personal situation.
• [06:11] Breakdown of Pete’s investment and savings buckets.
• [10:19] Pete details excess annual cash flow for additional investments.
• [13:10] Jill and Mark explain the tax logic behind brokerage contributions.
• [14:08] Mortgage payoff discussion and tradeoffs.
• [17:00] Confirmation on estate planning, insurance status.
• [17:41] Broader themes on wealth inequality and investing.

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Episode Takeaways

• If you already have a significant pre-tax retirement nest egg and income puts you in high tax brackets, extra dollars might be better off in a brokerage for flexibility and long-term capital gains treatment.
• Psychology (peace of mind) sometimes trumps pure math, especially with mortgage paydown—but understand the opportunity cost.
• Investing consistently over the past decade has supercharged returns, driving wealth divergence for those with market access versus those without.
• Ensuring estate plans and life insurance are in place is crucial, especially for primary wage earners with dependents.
• “Being an investor” (in the markets) should not be underestimated as a means of building wealth—sometimes more accessible and advantageous than real estate, especially in high-rate environments.

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Listeners who want tailored advice can contact the show through jillonmoney.com.

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(Summary skips ad reads and focuses solely on listener conversation and financial planning content as heard in the podcast.)

Transcript

[A]

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[B]

If that hits you close to home.

[A]

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[B]

Welcome to the Jill on Money show. It's Wednesday, September 10th and we are here trying to help you navigate your financial journey. Now whatever it is that's going on for you, it can be something small, it can be something big, it could be an opportunity, it could be a fear, could be all those different emotions that bring something up to the fore that you need some help with. Both Mark and I are cfps Certified financial Planners. Now, we don't do it for a living. We do it because we love this show and we love talking to you. And so you know, we're not we don't work for a financial firm. We just work for us. So if you have a question, all you need to do is go to our website, jillonmoney.com, click the contact us button, write us a note and if you want to join us on the program, just check the box. Mark will do everything else now while you're on the website, focus on Jill on Money Live just for today because we are having one of these fantastic live webinars tonight. But you can only join us if you are a subscriber to Jill on Money Live. For 45 bucks, you will have access to tonight's webinar focused on estate planning with an estate planning attorney and. And with a certified financial planner who's also a shrink, which I kind of love. You'll have tonight's webinar three more after that, the entire back catalog, bonus audio and video content, all for 45 bucks for the next 12 months. Incredible. So if that is something that is exciting to you, you might as well just subscribe today because until 3 o' clock today, you'll be able to join us live on the webinar tonight on estate planning. Okay, so for today, we are talking to Pete, who joins us from New York. Hello, Pete. Hey, Pete. Here's a question for you. Yesterday we had an email episode and a couple of people think we should do a live event in New York. Would you come to a live event in New York that is a Jill on Money event?

[C]

Yeah, I think it's a great idea and I would definitely come.

[B]

Where should we do it?

[C]

I think if you're going to do it in New York, you probably have to do it in New York City.

[B]

Yeah, I think so too. And when you say New York City, do you think Manhattan or do you think Brooklyn?

[C]

I think when people say New York City, they're saying Manhattan.

[B]

That's right, my man. Hear that, Mark? It's New York City means Manhattan. Thank you very much.

[D]

Okay, Pete, But I know where Pete lives. Brooklyn would be easier.

[B]

Yes, true, but. Okay, the trains work anywhere. Okay, Pete, what is going on? What can we do for you?

[C]

Well, I've been listening to you guys for a long time and I had a question because I felt like you guys have said, I know you love Roth and I agree, but I felt like you've said do a brokerage over a traditional 401k and that had me scratching my head.

[B]

Well, that's a great question. Actually, it kind of depends on what the alternative is. Sometimes we'll say brokerage with an older person because we know that person might need liquidity and we don't want to add to the burden of having that untaxed money that's in there. Okay, so that can be the case. But what about. Let's talk about you and whether it makes sense for you. So tell us about what's going on for you in your life and then we can kind of decide whether brokerage makes sense for you versus putting more money into a 401k who are you, Pete? And what's going on?

[C]

I'm a married father of three, in my mid-40s. I own a home worth about 850,000. I have an outstanding mortgage of $330,000. 17 years left at 3.2%, which is beautiful.

[B]

Oh boy. Yes. Oh my gosh. Yes. Okay.

[C]

I would like to pay down that mortgage quicker. I have a philosophical difference with you guys. I think.

[B]

Yeah, you're wrong and I'm right. Okay, that's fair. No, we'll get back. We're going to get that. But that's okay. It may be that it's okay. Later. Okay, so how much do you guys earn?

[C]

Call it 575.

[B]

Are the kids all. Are you like these college bound kids? You have 529 plans for them? What's happening?

[C]

Yeah, so I have based on age, from, from oldest to youngest, my, my kids are 15, 13 and 10. And I have 195,000, 153,000 and 112,000 respectively.

[B]

Right, that's great. Awesome. That's awesome. What about the amount of money that you guys have put away? Like give us a little bit of the breakdown of the assets that you have.

[C]

Sure, they've all fallen into different buckets now, unintentionally, but traditional 401K 508 Roth 401K 46,000. We have a rollover 403B from my wife for 58,000. We have a SEP that I just started, $9,000. And we. Oh, I have backdoor Roths of $48,000 and a brokerage of $50,000.

[B]

And what are you doing right now in terms of contributions? Are you putting all the money in the Roth 401?

[C]

Yes, I believe in Roth and I max it out, whatever that is, $23,000 or $24,000 annually into the Roth 401.

[B]

Great. And is your wife also working full time?

[C]

She's not. She works part time. Most of the income, nearly all the income comes from me.

[B]

Okay, and why the cept are you doing. Because you have a 401k. Are you doing something on the side? You have a little side hustle?

[C]

No, no, no. I'm a part owner in my company and it was something that recently became available to me and I really don't understand seps too much. But I'm trying to put in at this point around $30,000 a year. I'll see if I can keep that up.

[B]

This is a corporate benefit where they say you can do a 401k with a SEP. I'm unfamiliar with that as a. See, I'm used to like a 401k with a profit sharing plan, so I'm not as familiar with it. With a SEP. Mark, have you heard about that having like a 401k with a SEP alongside it?

[C]

Could it, could it help explain it that I have as an owner of. Part owner of my company? I am a corporation that's a part owner of my company and I think maybe that allows me to set up the sep. I'm really not sure.

[B]

Do you work with an accountant?

[C]

I do.

[B]

Just make sure your accountant, like gives a, a New York papal blessing. Actually a Jewish blessing.

[D]

But is it a Roth SAP, by the way?

[C]

It is not.

[B]

It's very strange to me.

[D]

I would. Well, we can get into it, but I would, I would instead put that money into a brokerage account.

[B]

See, there we go. Okay, so there is. This is going to be the interesting def, you know, delineation. First of all, I want to make sure that that's actually like, I don't know who put that in. I don't know if this is like, oh, I'm part owner of this corporation and the court. Because to me, a corporation can do a ton of incredibly interesting things. Like, I don't know if it's a corporation, not an llc. Right.

[C]

It's a professional, corporate. It's not an llc. I think it's a PC. It's not an llc. Yeah.

[B]

Okay. Because there are some really cool things that you can do alongside a 401k, which is you can put a 401k with a profit sharing plan on top of it, which is a really cool thing to do. I don't know how many partners there are. You can also put in your own pension plan. But again, I'm not going to get into that right this second. But this brings up the issue, which is you obviously have great cash flow because you're saving a lot of money. How much do you think you spend on a monthly or annual basis?

[C]

I forgot. I knew you were going to ask me that. Well, I think on a monthly basis, if I'm counting keeping the roof over my head, it's probably about 9,000amonth. But I'm not counting college savings in that because I feel like I turn that off if I need to. So about 9,000 month spending plus about 5,000amonth for college.

[B]

Okay. Okay. So let's not even put the 5,000. But even if it's 10,000amonth, you've got great cash Flow because you're putting in five grand into the college savings, which is amazing. And so what you're suggesting to me is that even beyond the 10 of expenses and the 5 in the college, that you have even more money available that you could fund the SEP or a brokerage. You sure? Excess cash flow, right?

[C]

Yes, yes.

[B]

How much do you think is that excess cash flow right now?

[C]

Yeah, yeah, I think a reasonable number, like I said, is about $30,000 a year. That's what I was thinking about. Yeah.

[B]

Okay, so now we're in this conversation which you actually. Now after I've asked you all these annoying questions, we're getting to your actual real question, why you contacted us, which is, hey, with this $30,000, Jill and Mark, why would I not put the money away pre tax into this SEP IRA considering I live in a very high cost of living area and a high tax state, New York, considering that, you know, my income, my wife and I as a household, that most of our income is taxed at 32, a little bit at 35%, but let's just call it mostly 32%. That's where like we're really socked in there. Like why Jill? So the answer is sort of twofold. One is you listen, you already have $570,000 in traditional money. Right. And that's sort of on ice right now. Right. Between the 508 and the 58, there's not new money going in there. And you've already now switched to the Roth 401K. And so we know that like going forward, the Roth is probably a better alternative for you. The issue around the SEP is that you're adding to your pre tax pile of money that will grow and grow and grow that will eventually have to be taxed. Right. Okay. So Mark, why is it advantageous for, for Pete and his wife to put that 30 grand a year into brokerage when they could be getting a tax deduction in the SEP ira?

[D]

I mean Pete already told us like he's all in on Roth. So he knows the deal, he knows the benefits and he knows that with pre tax money eventually that's it's going to have to come out. It's going to be taxed as ordinary income. I would much rather put the money into a brokerage account and pay capital gains.

[B]

And have to pay capital gains. Yeah, so.

[C]

And also I was not getting that part. It's capital gains in the brokerage, it's ordinary income.

[B]

Exactly, exactly. So if I looked at you guys right now, if for some reason you were like, I gotta sell something out of my brokerage account. What would the rate be for you guys? Because you are married, filing jointly. Right. The actual long term capital gains rate would be 15% plus a 3.8% Medicare surtax. But you're. So let's just say that the rate of capital gains that you would pay on that brokerage account. 18.8%. Now that 18.8, it's not a zero. Right. But it's 18.8 versus all that money that grows, that has not yet been taxed, will come out. And I bet you it's not coming out at 18 or 20%. It's just not. You're going to be at least in the 24% bracket later on in life. And so that is the, the capital gains rate is lower than ordinary income tax brackets. Pretty much. You could count on that. And also, I'll just say I like that you've got a little brokerage account. You're young, you're in your mid-40s. So I like having the access to the money and having a little bit of money that doesn't have to get tied up in a retirement account that gives you flexibility. Now, does that make sense to you?

[C]

Yeah, I was missing the part about the rates. I was thinking the brokerage. I'm going to pay tax anyhow, so wouldn't I want some tax advantage? But I wasn't thinking of the rates. So, yes, it does make sense.

[B]

Okay, can I go back to one other question that you, that I heard in your little voice as you the. The 3.2% mortgage with 17 years left, which I think you said, I'd like to pay that off early.

[C]

Yep.

[B]

Let's have a conversation.

[C]

Sure.

[B]

Just us. Just the three of us. Of course, you know, mathematically that that is not the wisest decision. Right.

[C]

Well, because I'm good. I can beat that. 3.2% on, you know, T bills or a CD.

[B]

Exactly. In a. In a very conservative or balanced portfolio. Now, let's just push the clock ahead. Let's say it's 10 years from now. Okay. And there's only seven years left on your mortgage and it's not that much money and the kids are all in college and everyone's good. You might say to me, I don't care if it's 3.2%, I just want this gone. That might be a time where. Sure. If you want to do it. If you want to make the. Like, I am not the kind of human being who believes that everything should be optimized mathematically. If that's kind of bugging you and for some reason you know something's going on and you're like, ugh, I just want to get rid of it. Sure. But for the next 10, 12 years, I wouldn't do anything with that three point and I wouldn't. It would be very hard for me. I'll tell you what, I have mortgages that are outstanding that are in that same range. I wish I had borrowed more money. That's how I feel. I really do. And the idea that I could have had sub 4% mortgage rates with more and more money, I wish, I wish I had that. But that's because I'm a little bit of a math head.

[C]

Yeah, no, I know I've. You'd be annoyed at me, but I've already paid off, I think two years of that mortgage. I've already cut it off. And I know mathematically it's bad, but it makes me feel good.

[B]

I know. If it may. But you know what also should make you feel good, which would be kind of fun for you to do, is like, why not look at what has happened? So it's like 10 years that you're 10 or 15 years, right, that you've been investing versus having that mortgage. And if you were to look at the rate of return on your accounts, I think that could make you feel really, really good. Meaning that, you know, you've probably earned 10, 12% a year for the first part of this mortgage being in place for the first 13 years. And what is, I mean, even if you said, oh, I invested at the very top of the market in 2007 or something, like right before the financial crisis, you still made 8% a year for the last 15 years. So I think it is the way to make yourself give yourself that peace of mind is to just remind yourself, hey, this was an amazing decision. We're so lucky, right? And if in again, the kids are in college, everyone's good and you just, it's like a nuisance and you're just like, oh, I'm just going to pay it down, fine. But I really think you guys are in great shape. You've done a fantastic job. You're of course going to tell me that you have your estate planning done, right?

[C]

I do healthcare proxies. All of it? Yep.

[B]

Oh, beautiful. And what about life insurance? Because you are the primary wage earner. So what's going on for you there?

[C]

I have term policies for both me and my wife that burn off in five years, 11 years, 15 years. And you know, it's. I think I have well over a million dollars in coverage. I think, I think we're okay there.

[B]

Okay. Just checking.

[D]

It's funny, you were talking about market returns beating the mortgage rates and you mentioned this. I think it was yesterday you mentioned this. So I actually looked for me personally and I looked at the last 10 years rate of return, 11.6%.

[B]

Thank you.

[C]

Yeah, it's outrageous.

[B]

It's incredible. We're so lucky to be investing during these years. It's also why not to bring everybody down. But like, honestly, it's one of the reasons that helps explain how the wealth inequality has blown out. Because if you think about 40% of the country not owning any investment and you think about the 60% that own something, you can see how it can just, that, that, that chasm is just massive and gets bigger and bigger. So it's not just the amount of money that I earned, but it's like I started investing 10, 15, 20 years ago and I think that's one of the reasons why. And we talked about this yesterday when we were going through emails. It's like one of the reasons why I wouldn't be so hep. If I were a parent right now to push my kids into buying a house. Because I think being an investor is going to be the way to accumulate and it has been a great wealth accumulation. And if you were lucky enough to get the mortgage at three and a quarter percent like Pete and his wife, that's awesome. But like, if you had to go in and buy a, you know, go buy a house and have a big down payment and have a six and a half percent note, like, maybe that's not something that's the smartest thing to do right now. It's just that we have to shift our mindset to at least compare these things. But you know what, Pete, you and your wife and your three kids, may you live long and prosper because you're doing great. So I hope that we, we got you on the. We hope we answered your questions. Anything else going on for you?

[C]

No. I think you've given me great advice. I appreciate it.

[B]

We appreciate you. Hey, if you are like Pete and you have this nagging belief or just nagging feeling like, oh, it would be so nice not to have that mortgage.

[A]

Let us run the numbers for you.

[B]

So that we can make you feel better. And if you are being presented with an idea about, oh, you know, you really should buy this house, because that's the only way to accumulate, well, not maybe not. So get in touch with us. Whatever's going on, we'd love hearing from you. Just go to the website jillonmoney.com, click the contact us button, write us a note, and if you want to come on the air, just check the box. Mark will do everything else. Don't forget to sign up for the free weekly newsletter and don't forget to sign up for Jill on Money live by 3 o'clock today. If you want to join us tonight for our estate planning O Rama. It's going to be great fun, really. We're going to make death and disability and all those things. We're going to make it fun. It's going to be great. Join us tonight. Again, you have to be a member of Jill on Money Live. You can subscribe to us on the Odyssey app or wherever you find your favorite podcast. Don't forget to leave us a rating and review. Wherever you listen, do something nice for someone else today. Change your work, change your wealth, change your life. Thanks for listening. We'll talk to you tomorrow.

[A]

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[E]

Three judges, one bench, zero room for nonsense. I'm Judge Dan Mentzer. Joining me are Judge Rachel Juarez and Judge Yodit Towelde. And on Hotbench, we don't just hear cases, we debate. What she's asking for is for the payments that she made on his car.

[B]

But there's still payments to be made.

[E]

Correct and we deliver justice. That is the verdict of the court. Follow and listen to the Hot Bench podcast on the free Odyssey app or wherever you get your podcasts.