If you've maxed your Roth IRA at 35, you're ahead of the vast majority of your peer group. According to IRS data, only about 15% of IRA-eligible Americans maximize their Roth contribution in any given year. Getting to the point where you have extra savings beyond the Roth IRA cap is genuinely uncommon, and it means the next investing decision matters.
The question most financial guides don't answer specifically: after the Roth IRA is maxed, do you put extra money into your 401k (up to the $23,000 annual limit in 2024) or open a taxable brokerage account? Both are legitimate choices. The default advice — 'always maximize your 401k before investing anywhere else' — is oversimplified. For some people, a taxable brokerage account should come before extra 401k contributions. For others, the 401k is clearly the better choice. The difference comes down to three questions about your specific situation.
The Three Questions That Drive the Decision
Answer These Before You Choose a Path
Question 1: What are the expense ratios on your 401k's investment options?
Look at your 401k plan's fund lineup. Find your target fund or index fund. Check the expense ratio. If your best index fund option charges more than 0.50% per year, your 401k is expensive — and the tax deduction it provides may not fully offset the long-term cost of the higher fees.
The math on this is significant. We've covered in detail how a 1% expense ratio costs over $137,000 more than a 0.03% expense ratio on a $50,000 investment over 30 years. If your 401k's best option is a 0.8% fee fund, you're giving up a significant portion of the tax benefit versus investing in a 0.03% or 0% fee index fund in a taxable account at Fidelity or Vanguard.
Expense ratio thresholds for this decision:
– Under 0.20%: Your 401k has excellent options. Favor extra 401k contributions.
– 0.20%-0.50%: Mixed. The tax deduction still typically wins, but the margin is smaller.
– Over 0.50%: Seriously consider a taxable brokerage account instead of extra 401k contributions beyond the minimum needed for any employer match.
Question 2: Do you plan to retire before age 59½?
Standard 401k and traditional IRA funds are penalized (10% early withdrawal penalty plus ordinary income taxes) if you access them before age 59½. A taxable brokerage account has no access restrictions whatsoever — you can sell investments and access the money at any age, for any reason, paying only capital gains taxes on the profits.
If you're 35 and planning to retire at 50, 52, or 55, you need a bridge account that you can access in the years between retirement and age 59½. A taxable brokerage account is that bridge. Without it, you're locked out of your largest accounts for up to 10 years after you stop working.
Question 3: Do you want flexibility in the next 10-15 years?
401k money is locked (with exceptions) until retirement. Taxable brokerage money is always accessible. If there's a reasonable chance you'll want to use invested money before 59½ — for a business investment, a real estate purchase, an extended leave from work, or any significant financial decision — the taxable account's flexibility has real value that doesn't show up in a tax calculation.
When Extra 401k Contributions Are the Right Choice
The Case for Going to the $23,000 Limit
The traditional 401k's primary advantage is the upfront tax deduction. At a 22% federal tax bracket (income $47,150-$100,525 for single filers in 2024), every $1,000 contributed to a traditional 401k reduces your tax bill by $220 that year. On a $16,000 extra 401k contribution (from the Roth IRA limit of $7,000 up to the 401k limit of $23,000), the tax savings are $3,520 per year.
This upfront deduction matters most when:
– Your current tax bracket is 22% or higher (you're paying meaningful taxes now)
– You expect your retirement income — and therefore your withdrawal tax rate — to be lower than your current bracket
– Your 401k plan has good low-cost index funds (expense ratios under 0.20%)
– You don't plan to retire before 59½
If all four of those apply to you, maximizing your 401k before opening a taxable brokerage account is the mathematically correct move for most people in most scenarios. The tax-deferred compound growth plus the immediate tax deduction creates a powerful long-term advantage.
When a Taxable Brokerage Account Should Come First
The Scenarios Where the Math Flips
Scenario 1: Your 401k options are expensive.
If your plan's best equity fund charges 0.70%, 0.80%, or 1.00% per year, you're trading a tax deduction for guaranteed fee drag. At 35 with 30+ years of investing ahead of you, a 0.70% fee versus a 0.03% fee on a $50,000 balance compounds to a $100,000+ cost over a career. The 401k tax deduction — roughly $220 per $1,000 contributed at the 22% bracket — doesn't fully compensate for that drag in high-fee plans.
In this case: Contribute to the 401k up to the employer match (always capture the match — it's an instant 50-100% return). Then open a taxable brokerage at Fidelity or Vanguard and invest in a 0% fee index fund (Fidelity Zero Total Market Fund, ticker FZROX, has a 0.00% expense ratio). The fee savings over 30 years outweigh the lost tax deduction in many high-fee 401k scenarios.
Scenario 2: You want to retire early.
If your FIRE number is 'retire at 50 or 52,' a taxable brokerage account is essential infrastructure. You need assets you can access before 59½ without penalty. A Roth IRA contribution ladder (converting traditional IRA or 401k funds to Roth and waiting 5 years to access them penalty-free) is one strategy for bridging the gap — but it requires careful planning and doesn't work for everyone.
For early retirement planning, a healthy taxable brokerage account provides clean, straightforward access to your investments at any age, taxed only at long-term capital gains rates (which are lower than ordinary income rates for most people).
The Tax Advantage of the Taxable Account Most People Overlook
Long-Term Capital Gains Rates Are Surprisingly Friendly
When you sell investments held more than one year in a taxable brokerage account, you pay long-term capital gains tax — not ordinary income tax. This distinction matters enormously in retirement.
Long-term capital gains tax rates for 2024:
– 0% for income up to $47,025 (single) or $94,050 (married filing jointly)
– 15% for income up to $518,900 (single) or $583,750 (married)
– 20% only above those levels
Traditional 401k withdrawals, by contrast, are taxed as ordinary income at whatever tax bracket you're in at the time of withdrawal. If your RMDs (required minimum distributions, which begin at age 73) push your retirement income into the 22% or 24% bracket, every dollar coming out of a traditional 401k is taxed at that rate.
A couple in retirement with $60,000/year in investment income drawn from a taxable brokerage account (all long-term capital gains) pays 0% federal capital gains tax on the entire amount. The same $60,000 coming from a traditional 401k is taxed at ordinary income rates — potentially $6,000-$10,000 in federal taxes on that same $60,000.
The practical implication: a taxable brokerage account gives you tax rate flexibility in retirement. You can choose which account to draw from based on your income that year. In low-income years, draw from the taxable account and pay 0% LTCG. In higher-income years, draw from the Roth IRA (also tax-free). Reserve traditional 401k withdrawals for the minimum required.
This three-bucket retirement income strategy — taxable brokerage (LTCG rates), Roth IRA (tax-free), traditional 401k/IRA (ordinary income) — is one of the most powerful tools for lowering lifetime taxes. Our guide to Roth IRA contribution limits, income rules, and how to invest inside a Roth covers the tax-free bucket in detail, including the conversion strategy for people who expect higher retirement income.
The Practical Setup: Opening a Taxable Brokerage
Where to Open It and What to Buy
If a taxable brokerage account is the right next move for you, the setup is simple:
Where to open it: Fidelity (fidelity.com) or Vanguard (vanguard.com). Both offer individual taxable brokerage accounts with no account minimums, no annual fees, and access to index funds with expense ratios of 0-0.04%.
What to invest in: A total US stock market index fund or an S&P 500 index fund. In a Fidelity account: FZROX (Fidelity Zero Total Market Index, 0.00% expense ratio) or FSKAX (Fidelity Total Market Index, 0.015% expense ratio). In a Vanguard account: VTI (Vanguard Total Stock Market ETF, 0.03% expense ratio) or VTSAX (mutual fund equivalent, 0.04%).
For a broad picture of how much you should have invested by your mid-30s and how taxable brokerage, Roth IRA, and 401k balances fit together into an overall net worth target, see our breakdown of savings and investment benchmarks at 30, 35, and 40 — the numbers suggest that someone contributing to all three account types from their late 20s is typically well ahead of median by 35-40.
A good book for going deeper on this entire framework: The Simple Path to Wealth by JL Collins is the clearest explanation of why total market index funds in taxable accounts, combined with 401k and Roth IRA, outperform almost any other approach for most investors — especially the chapter on why low expense ratios matter more than investment selection at this asset level. And for the early retirement angle, Your Money or Your Life by Vicki Robin is the foundational text on building investment accounts designed for access before traditional retirement age — the taxable brokerage strategy described in this article is central to the approach it outlines.
The Short Answer
If your 401k has low-cost index funds (under 0.20% expense ratios) and you don't plan to retire before 59½: maximize your 401k first, then open a taxable brokerage with anything left over.
If your 401k has expensive funds (over 0.50% expense ratios), or you want early retirement flexibility: contribute to the 401k only up to the employer match, then direct extra savings to a Fidelity or Vanguard taxable brokerage account in a total market index fund.
Either way, you're in the top 10% of personal finance decisions a 35-year-old can make. The account type optimizes the outcome. The habit of investing — which you've already built — is what actually builds wealth.