Should You Have an IRA and a Brokerage Account?

Updated July 31, 2023

Disclaimer: The writers here are not financial or investing experts. The following content should only be viewed for educational purposes. Read our full disclaimer for more information.

Although IRAs offer tax benefits to help you save for retirement, they also have contribution limits and withdrawal rules you must follow if you don't want to incur a penalty. Adding in a brokerage account in addition to your IRA can provide more flexibility even though you will not get the same tax benefits of an IRA. Lets look at the key differences and how you can use both accounts effectively.

IRAs vs brokerage accounts - key differences

An IRA, or individual retirement account, is designed specificially to help you save for retirement by offering a variety of tax benefits. The two most popular IRAs are the Roth and Traditional IRA. A brokerage account is simply a general investing account in which you can buy and sell a range of investments.

The primary difference between the accounts are the eligibility and contribution limits, the way the accounts are taxed, and the withdrawal rules for the accounts. IRAs have contribution limits, offer tax benefits, and have withdrawal rules you must follow if you don't want to pay an early withdrawal penalty.

Brokerage accounts don't have contribution limits, and don't have tax benefits. Brokerage accounts also do not have any mandatory withdrawal rules. You can freely withdraw your investments and earnings from your brokerage account as needed, but you will be subject to either short or long term capital gains tax.

Eligibility and contribution limits

The two most popular IRAs, the Traditional and Roth, have slightly different elgibility requirements. In general, if you have earned income, you can open a Traditional IRA. If your income is $218,000 or less if you are married filing jointly, or $138,000 or less if you are filing as an individual you can open a Roth IRA. The total amount you can contribute to one or more IRAs is $6,500 per year, or $7,500 if you are 50 or older.

Unlike an IRA, a brokerage account does not have any eligibility or contribution limits. Once you are 18, you are eligible to open a brokerage account. It does not matter if you make $50,000 or $500,000 per year. You can contribute as much as you would like to the account which can give you more flexibility than an IRA.

Tax benefits

Traditional and Roth IRAs have different tax benefits. A Traditional IRA lets you defer paying tax until you take withdrawals in retirement. Contributions to a Traditional IRA can also potentially be tax deductible depending upon a variety of factors.

The tax benefits of a Roth IRA are just the opposite to a Traditional IRA. With a Roth IRA, you pay tax on the dollars you contribute to the acccount today, but then have tax free withdrawals from the account in retirement. Contributions to a Roth IRA are not tax deductible.

Unlike an IRA, a brokerage account does not offer any tax benefit. Instead you will pay either short term or long term capital gains tax. In general, if you hold your investments for a year or less, you will pay short term capital gains tax which is the same as your regular income tax rate.

If you hold your investments for longer than a year, you will pay long term capital gains tax rates which are more favorable. Long term rates can be 0%, 15%, or 20% depending on your income. It should also be noted that if you received any dividends or interest from your investments, you will typically pay tax on the amount of interest you earned at your regular income tax rate.

Withdrawal rules

You can start withdrawing from your Traditional IRA at age 59 and 1/2 at which point your withdrawals will be taxed as ordinary income. If you try to withdraw before this, you can be subject to a 10% early withdrawal penalty. You are also required by the IRS to start taking required minimum distributions from a Traditional IRA starting at age 73.

The withdrawal rules for a Roth IRA are slighly different. You can withdraw the base amount you contributed to the account since you have already paid tax on your contributions. However, if you want to withdraw any earnings you must be 59 and 1/2, and your Roth IRA must be at least 5 years old. If you try to take a withdrawal outside of these rules, you can incur a 10% penalty as well as taxes.

A brokerage account does not have any withdrawal rules. You can take the money out of your account whenever you desire. Keep in mind that when you do withdraw your earnings, you will be subject to either short or long term capital gains tax. It is best to hold your investments in your brokerage account for at least a year in order to get the most favorable tax rate.

Should you have both?

The short answer is that adding a brokerage account can provide more flexibility once you have taken advantage of an IRA. A brokerage account allows you to freely access your investments and there are no limits on who can have one, or how much you can contribute.

With that being said, it is still best to open an IRA before you have a brokerage account primarily due to the tax benefits. However, once you have contributed the maximum limit to your IRA, opening a brokerage account can allow you to keep investing.

How to use both accounts effectively

Step 1: Open up an IRA, preferably a Roth

Since IRAs provide more tax benefits than a brokerage account, it is a better idea to put your dollars into an IRA first. If you qualify, we recommend opening a Roth IRA over a Traditional IRA as you will have tax free withdrawals in your retirement. After you have opened an IRA and selected your investments, contribute the max amount allowed which is $6,500 per year, or $7,500 if you are 50 years or older.

Step 2: Open a brokerage account

After you have funded your IRA, you can open a brokerage account if you are able to invest more dollars and want an account that offers more flexibility than an IRA. You can invest as little or as much as you want in your brokerage account.

Where you can open an IRA and a brokerage account

Almost all online brokers and advisors offer both IRAs and brokerage accounts. We recommend opening an IRA through a robo advisor. A robo advisor will choose your investments for you based upon your goals and risk tolerance. This can take some of the guess work out of investing, especially when your IRA is one of the main accounts for your retirement. You can see our picks for the top robo advisors here.

If you decide that you would also like to have a brokerage account in addition to an IRA, you can open that through an online broker or a trading platform. Both online brokers and trading platforms offer tools to help you choose your investments which can be advantageous given the flexibility of a brokerage account. You can see our picks for the top online brokers and top trading platforms to learn more.

Related posts