IRA vs. Brokerage Account: What's the Difference? (2024)

FAQs

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

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.

Despite lacking the flexibility that most brokerage accounts provide, IRAs offer unique tax benefits that make them particularly useful. Contributions to a traditional IRA grow tax-deferred, meaning you only pay taxes when withdraw money.

Brokerage accounts don't offer all the services that a traditional bank offers. Brokerages might not offer additional products such as mortgages and other loans. Brokerages may not have weekend or evening hours.

If the value of your investments drops too far, you might struggle to repay the money you owe the brokerage. Should your account be sent to collections, it could damage your credit score. You can avoid this risk by opening a cash account, which doesn't involve borrowing money.

A brokerage account is an investment account from which you can purchase investments such as stocks, bonds and mutual funds. You can add money to a brokerage account, similar to depositing funds into a bank account. Brokerage accounts have no contribution limits or early withdrawal penalties.

Taxable brokerage accounts. An ordinary brokerage account that is not a retirement account is a taxable investment account. If you make money because your investments go up in value, or because your investments pay you dividends or interest, this income will be taxed.

IRA drawbacks

One drawback of using IRAs to save for retirement is that the annual contribution limits are relatively low. In 2024, you can contribute up to $23,000 to a 401(k) plan, but you can only contribute $7,000 to an IRA in 2024 unless you're at least 50 years old, in which case the limit is $8,000 in 2024.

This means if your brokerage account goes under, you won't automatically lose your money. But you will lose your money if your investments do poorly, or you sell off assets when their value is down.

Millionaires use brokerage accounts for low-cost index funds. “Buying and holding index funds in a brokerage account, it's possible to keep and grow wealth over the long term,” according to Business Insider.

If you've got a large chunk of cash, you might secure better returns outside of a brokerage account. You could lose money. If your money is swept into a money market fund, that cash won't be insured by the FDIC or SIPC. It's possible to lose money.

How much money is safe to keep in a brokerage account? ›

Holding cash here is appropriate if you plan to spend the money within a few days or would like to quickly place a trade. Assets in your brokerage account are protected up to $500,000 per investor, including a maximum of $250,000 in cash by SIPC in the event a SIPC-member brokerage fails.

FDIC insurance protects your assets in a bank account (checking or savings) at an insured bank. SIPC insurance, on the other hand, protects your assets in a brokerage account. These types of insurance operate very differently—but their purpose is the same: keeping your money safe.

Spreading your assets across different brokerage accounts can help protect you against potential fraud or unauthorized access, Roller says. If one broker has a breach, then you can still trade with another investment firm. The safety of your funds is also a concern.

Brokerage accounts are taxable, but provide much greater liquidity and investment flexibility. 401(k) accounts offer significant tax advantages at the cost of tying up funds until retirement. Both types of accounts can be useful for helping you reach your ultimate financial goals, retirement or otherwise.

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.

Overview. Typically, when a brokerage firm fails, the Securities Investor Protection Corporation (SIPC) arranges the transfer of the failed brokerage's accounts to a different securities brokerage firm. If the SIPC is unable to arrange the accounts' transfer, the failed firm is liquidated.

The first places you should generally withdraw from are your taxable brokerage accounts—your least tax-efficient accounts subject to capital gains and dividend taxes. By using these first, you give your tax-advantaged accounts (IRA, Roth IRA) more time to grow and compound.

For asset transfers involving assets that you hold outside of a retirement account, such as in a regular taxable brokerage account or taxable mutual fund account, you're not allowed to do an in-kind transfer to an IRA.

The 401(k) is simply objectively better. The employer-sponsored plan allows you to add much more to your retirement savings than an IRA – $23,000 compared to $7,000 in 2024.

There are tax benefits, and your money has a chance to grow. Every little bit helps. If your employer doesn't offer a retirement plan—or you're self-employed—an IRA may make sense. And if you have a 401(k), an IRA can help you build your nest egg faster.