Roth IRA vs. Brokerage Account: Understanding the Differences

When it comes to investing, choosing the right account is crucial. Two popular options are Roth IRAs and brokerage accounts. While both account types can help you grow your investments, they have distinct differences, particularly in terms of tax advantages.

Roth IRAs are designed primarily for long-term savings goals, making them a great option for retirement and certain situations like buying your first home. On the other hand, brokerage accounts offer more flexibility in terms of when and how you can access your money.

Key Differences Between Roth IRAs and Brokerage Accounts

Here are the major differences to consider:

• Income Requirements: Anyone can open a brokerage account if they have a Social Security number or taxpayer identification number, regardless of their income level. However, Roth IRAs have specific income limits. To contribute fully, your income must be greater than zero but below certain thresholds, which vary depending on your tax status.
• Contribution Limits: There are no limits on how much money you can deposit into a taxable brokerage account. In contrast, Roth IRAs have annual contribution caps. For instance, in 2025, you can contribute a maximum of $7,000 if you are under 50 years old and $8,000 if you are 50 or older. Additionally, contributions to Roth IRAs are phased out for high earners, cutting off completely at modified adjusted gross incomes of $165,000 for single filers and $246,000 for joint filers.
• Investment Choices: Both account types offer various investment options, but Roth IRAs have restrictions. For example, you cannot invest in assets like collectibles, such as art or antiques, or in life insurance within a Roth IRA. These options might be more readily available in brokerage accounts.
• Withdrawal Rules: Roth IRAs have strict rules regarding earnings withdrawals. You can only take out earnings without penalties if you're over age 59 ½, a first-time homebuyer, disabled, or a beneficiary of a deceased person's Roth IRA. To access earnings tax-free, the account must be open for at least five years. Withdrawals that do not meet these criteria may incur income taxes plus a 10% penalty. In contrast, brokerage accounts allow you to withdraw any funds or earnings at any time. However, selling investments to access funds may lead to a capital gains tax liability.

Similarities Between Roth IRAs and Brokerage Accounts

Despite their differences, Roth IRAs and brokerage accounts share some characteristics:

• No Tax Deduction on Contributions: Neither Roth IRAs nor brokerage accounts offer immediate tax benefits like traditional IRA contributions, which can be tax-deductible.
• Withdrawal of Contributions: You can withdraw the amount you contributed to a Roth IRA without any tax or penalty at any time. This is also true for funds in a brokerage account, although capital gains taxes may still apply.
• Accessibility: Both account types can be easily opened online through several providers, which may have varying features, fees, and investment options.

When to Use a Roth IRA

Roth IRAs are mostly suitable for long-term retirement savings. Qualified withdrawals are tax-free, and you can access up to $10,000 for a first-time home purchase without penalties if certain conditions are met. However, using a Roth IRA for home purchases may delay your retirement savings growth.

Another great use for a Roth IRA is for minors through custodial accounts. Teens can contribute if they have earned income, giving them a head start on their financial future.

When to Use a Brokerage Account

Brokerage accounts lack the tax advantages of Roth IRAs but provide more flexibility. They are better suited for other financial goals, such as saving for upcoming major expenses. Additionally, they can serve as a supplementary investment account for retirement, especially for those who cannot contribute to a Roth IRA.

Investments in a brokerage account held for more than one year are taxed at long-term capital gains rates, which can be advantageous compared to tax rates on traditional IRA distributions.

It’s important to assess your investment time frame. Conventional advice suggests avoiding investing in stocks if you may need the money within five years, as market fluctuations can impact your returns.

Roth, Brokerage, Investing