I do not understand the following: why do I want to invest in retirement account and not be able to access my money until I am old rather than taking my money now and invest them in stocks directly myself.

I mean retirement accounts still invest your money in stocks. They just lock your money for unclear to me reasons. So why would I be interested in having my money in retirement accounts?

Does government insure retirements accounts?

  • Based on previous questions the OP is in the USA.
    – Victor
    May 22, 2017 at 11:41
  • 3
    Retirement plans are often tax exempt (or shifted) as a government incentive to save more money for retirement which also means they have to be locked until that time. Often enough it doesn't work on the very poor though. May 23, 2017 at 8:29

3 Answers 3


Because retirement account usually are tax effective vehicles - meaning you will pay less tax on any profits from your investments in a retirement account than you would outside.

For example, in my country Australia, for someone on say $60,000 per annum, if you make $10,000 profits on your investments that year you will end up paying 34.5% tax (or $3,450) on that $10,000 profits. If you made the same profits in a retirement account (superannuation fund) you would have only paid 15% tax (or $1,500) on the $10,000 profit. That's less than half the tax. And if you are on a higher income the savings would be even greater.

The reason why you can't take the money out of a retirement account is purely because the aim is to build up the funds for your retirement, and not take it out at any time you want. You are given the incentive to pay less tax on any investment profits in order for you to save and grow your funds so that you might have a more comfortable retirement (a time when you might not be able to work any more for your money).


In the US, the key to understanding the benefits of retirement accounts is to understand capital gains taxes and how they work.

Retirement accounts are designed for making investments throughout your career, then after several decades of contributions, withdrawing that money to pay for your needs when your full-time employment has concluded.

Normally when you invest money in a brokerage account, if the value of your investment increases, and you sell in less than a year, those investments are considered short-term gains and taxed as ordinary income. If you hold that same investment for over a year, the same investment is taxed at a lower capital gains rate (depending on which tax bracket you are in during that year, the amount due could be up to 20%, but much lower than your regular income tax rate).

When you place your money in a retirement account, you are choosing to either pay the tax due on the income when you put it in the account, or put the money in tax free and pay the tax when you withdraw (these are called tax-deferred accounts).

When you have money invested several decades, the raw dollar amount increases greatly, but inflation is also reducing the value of those dollars. Imagine you bought some bonds that payed 4% over 40 years, but inflation was 2% during those same years. When you sell those bonds 40 years later, you will owe capital gains on the entire gain even though half of the gain came from inflation.

Retirement accounts allow you to buy and sell according to your investment needs and goals without any consideration about whether the gains are short-term or long-term, and they also allow you to pay taxes just once, either when you put it in, or when you take it out, with no worries about whether you're paying taxes on inflated gains.


@Victor above has provided a very good answer, I shall try and highlight some differences. The differences are specific to a country, however, it does offer some insight regarding the difference between investing in retirement fund vis-a-vis investing in stock directly:

  1. In many countries the retirement fund is mandated by the govt. and has to be invested in (in form of direct deduction from salary) ~ Investing in stock is up to the individual

  2. In many cases (if not most) capital gain/interest accrual in retirement funds are not taxable ~ Depending upon current laws capital gain (long term/short term) from stocks are taxable

  3. Retirement funds are managed and are (in general) more stable in their returns ~ Returns from direct stock investments are dependent on investment decisions of the investor

  4. Retirement funds tend to, (though this is very country specific) return somewhat less than market, as an example, in India Public Provident Fund (PPF)/Employee Provident Fund (EPF) return 8.68% tax free ~ As for direct investment on stocks, Nifty has returned approx. 17% CAGR over 15-20 years.

Given the above, if you can invest in stock by taking informed calls and you have a good understanding of the financial markets and their underpinning and (probably) looking at long term investment, then investing directly in stock could fetch returns that might not be paralled by retirement funds.

If on the other hand, if you feel investing in stock is not for you, then it probably is better to stick with retirement funds and other low risk investments.

Either way, you probably have to (and may be you should) carry some portion of your portfolio as retirement funds.

  • 1
    Most people can easily invest in a managed fund outside of retirement, and many can invest directly into shares inside a retirement fund - so I don't really think these are differences between retirement accounts and non-retirement accounts.
    – Victor
    May 22, 2017 at 8:04
  • @Victor, as I mentioned, the structure of retirement funds vary between countries. As an example, in India, you cannot choose to invest your retirement fund in equity. In fact you cannot choose any instrument, only assurance is 8.68% taxfree returns. So, yes there are differences given the context we are refering to.
    – Ironluca
    May 22, 2017 at 11:09
  • I don't think the OP is in India, in fact I am pretty sure he is in the USA, where you can. So the real difference is the tax sheltering as an incentive to build up the funds. In Australia as well we can also invest in may things that we can invest in outside retirement account. Also, anyone can invest in managed fund outside of retirement account.
    – Victor
    May 22, 2017 at 11:23
  • @Victor, the question is not tagged with any specific location. I agree with you that one has the option to invest in any instrument he/she likes, only I do not agree is that the only difference between retirement fund and individual stocks is tax treatement. It is tax treatement + potential for return
    – Ironluca
    May 22, 2017 at 11:29
  • I agree that the potential for return is greater in retirement accounts, purely because if you are paying less tax on your returns, then through compounding, returns over the long term will be much higher, which is the whole point of retirement accounts being tax friendly.
    – Victor
    May 22, 2017 at 11:57

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