IRA vs. Brokerage Account: What's the Difference?

IRAs and brokerage accounts have a few things in common. Namely, you can invest in stocks and securities through either one. The key differences lie in how the accounts are taxed and whether you’re investing for the short or long term.

With brokerage accounts there are no contribution limits (as you would have with IRAs), and there are no withdrawal penalties either. But brokerage accounts are taxable, unlike IRAs which are either tax-deferred or tax-free and have rules around contribution and withdrawals.

What Is an IRA?

An investment retirement account or IRA is a long-term investment account that allows you to make contributions up to a certain limit.

If you’re younger than 50 years old, your maximum IRA contribution for 2024 is $7,000.

If you’re 50 or older, your maximum IRA contribution is $8,000.

Note: IRA contribution limits are for all IRAs combined. These amounts are adjusted for inflation and may change annually.

With Roth IRAs, there are income limits that dictate how much you’re able to contribute to the Roth account. There are also rules around traditional and Roth IRA withdrawals.

Traditional vs. Roth IRA

Both traditional and Roth IRAs have penalties for early withdrawals. If you take money out before the age of 59½, you’ll incur a 10% penalty for either type of IRA, unless you qualify for certain exceptions.

One of the main differences between a traditional IRA and a Roth is the income limit with IRAs. In 2024, if you wish to contribute the full amount to a Roth IRA, for example, your income must be less than $146,000 if you file a single tax return or $230,0000 if you’re married filing jointly.

Refer to the IRS for more on IRA contributions you can make based on filing status in 2023.

What Is a Brokerage Account?

A brokerage account may allow you to buy, sell, and hold a variety of assets, including stocks, bonds, exchange-traded funds, and mutual funds. To initiate investment through a brokerage account, you add funds to your account, which can be managed in several ways:

  • Manage it yourself. Self-managed portfolios allow you to buy, sell, and trade through an online trading platform.
  • Hire a manager. Having an “actively managed” portfolio involves having a financial professional select funds based on your unique goals and preferences.
  • Use a robo-advisor. Once you indicate your settings, your investments are automated accordingly, and your portfolio is rebalanced automatically.

Is an IRA a Brokerage Account?

No. Brokerage accounts are distinct from IRAs in several ways. For example, some brokerage accounts may not charge fees to open and maintain or make withdrawals. There are no restrictions on how much you can invest in a brokerage account, and you can readily buy, sell, and trade for short-term or long-term potential gain.

IRAs, on the other hand, have strict rules around when you can withdraw without penalty as well as how much you can contribute annually. IRAs are seen as long-term investment vehicles while a brokerage account allows for short-term investment opportunities and withdrawals.

Is a Brokerage Account a Retirement Account?

It can be, depending on how you treat the account. But retirement accounts are generally long-term, wealth-building assets whereas brokerage accounts may include assets you plan to hold for the short or long term.

With brokerage accounts, you’ll be taxed on capital gains once you’ve sold a security, so tax rules on the earnings are different. And of course, there are no withdrawal requirements for a brokerage account.

If your intention is to invest for retirement, however, financial professionals generally recommend funding in this order:

  1. Traditional retirement plan (e.g., 401(k), 403(b), and other employer-sponsored plans)
  2.  IRA
  3. Brokerage account

This way you’re maxing out any employer-matching opportunities with a traditional IRA plan; you’re leveraging tax-free growth potential and penalty-free withdrawal in the future with a Roth; and whatever you have left can be invested in funds through a brokerage account.

Brokerage vs. IRA Taxation

Brokerage account income is taxed as you go. For example, if you sold stocks in 2024, you’ll be taxed in 2024 on any dividends, capital gains, or interest earned from the sale of those stocks.

Traditional IRAs allow you to deduct contributions from your taxable income for the year. Earnings and gains on traditional IRAs are generally not taxed until you take distributions.

Roth IRAs require after-tax contributions: You’ve already paid your taxes and then you make your Roth contribution. This allows you to benefit from tax- and penalty-free withdrawals in the future when you become eligible for distributions.

Brokerage vs. IRA Investment Options

IRAs and brokerage accounts both offer flexibility and control in terms of investment options. These include the ability to invest in stocks, bonds, mutual funds, ETFs, REITs, and more.

A self-directed IRA or SDIRA offers the added advantage and flexibility of allowing you to invest in real estate (as investment property only).

With IRAs, you’ll generally have a minimum deposit requirement of $1,000 whereas many brokerage accounts have no minimums to get started.

Investment Fees

Depending on where your brokerage account is held, you may pay a per-transaction fee or there may a sliding-scale commission fee based on the size of your trade.

Depending on where your IRA is held, there may be: 

  • Maintenance and advisory fees (flat rate or percentage)
  • Transaction fees and commissions
  • Account minimums

When deciding whether to open an IRA or a brokerage account, be sure to do your research on companies and their fees.

Learn More About IRA Options

Contact MissionSquare Retirement.

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