Brokerage Account vs. IRA: Which Is the Best Way To Invest?
Written by
Dawn Allcot
Edited by
Maria Concepcion
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
In a best-case scenario, you max out your 401(k) every year and get matching funds from your employer. But maybe you still have money left to invest to build your retirement nest egg. You might wonder if you should open a standard brokerage account or an individual retirement account (IRA). As with so many finance-related things, your decision may change depending on your situation. Understanding the basics of these two common types of investment accounts can help you make the right choice.
What Is a Brokerage Account?
A brokerage account, sometimes called a standard brokerage account, is an account where you deposit funds with the intention of investing them. As GOBankingRates previously shared, investment options in a brokerage account can include:
- Stocks
- Bonds
- ETFs (Exchange-traded funds)
- Mutual funds
- REIs
What Is an IRA?
An IRA, an individual retirement account, is a tax-advantaged investment account that allows you to make tax-free contributions to the account and withdraw the funds upon retirement. A Roth IRA, which is similar, does not let you deduct deposits from your taxable income. But you can withdraw funds, tax-free, in retirement.
Advantages and Disadvantages of a Brokerage Account
A brokerage account has no limits on the amount of funds you can deposit or invest. You may want to keep cash deposits under $250,000 and the total value of your securities under $500,000 per brokerage, which is the amount covered by SIPC insurance issued by the Securities Investor Protection Corporation. Like FDIC insurance for banks, the SIPC covers funds in your investment account if the brokerage fails.
A brokerage account allows you to withdraw your funds at any time, whether or not you’ve retired. If you’re investing to build passive revenue streams before retirement, a brokerage account can help you accomplish this.
The key disadvantage to a brokerage account? You won’t get any tax benefits. Everything from capital gains you earn through the sale of your investments to dividends you collect for being a shareholder is considered taxable income.
You can, however, minimize taxes through a process called tax-loss harvesting, which involves selling underperforming stocks at a loss to offset gains from successful investments.
Advantages and Disadvantages of an IRA
The biggest advantage of an IRA is the tax benefits. Whether you save on taxes now with a traditional IRA or in retirement with a Roth IRA, those savings can help your overall financial planning.
The biggest drawback to an IRA is contribution limits; you can only contribute $7,000 to an IRA in 2024 if you are under 50 years old. If you’re over 50, you are allowed catch-up contributions of $1,000 more, for a total of $8,000. Unlike brokerage accounts, that limit applies across all IRAs you might own, not each individual account. In other words, you can open three separate brokerage accounts at different financial institutions, each with $500,000 in securities. Every dollar will be SIPC-insured.
IRA or Brokerage: Which Is The Best Choice?
If you save specifically for retirement and only expect to put away $7,000 per year, an IRA can help you achieve your goals. But if you want to generate passive income for early retirement or build financial security, a brokerage provides more extensive options.
Many people find that holding both types of accounts can better meet their financial needs. You can also speak with a financial advisor for additional guidance.
More From GOBankingRates
- 5 Japanese Cars To Stay Away From Buying
- Ramit Sethi: How To Become Rich on a Low Salary
- 5 Clever Ways to Speed Up Your Retirement Savings
- 3 Things You Must Do When Your Savings Reach $50,000
