Written by Sam Taub, NerdWallet
The investment information provided on this page is for educational purposes only. NerdWallet, Inc. does not provide advisory or brokerage services and does not recommend or advise investors to buy or sell particular stocks, securities, or other investments.
January is a great time to start working towards your financial goals. If you want to start investing, the first step is to open an investment account. But which type of account is right for you?
Roth IRAs have tax benefits and can be useful for long-term savings goals such as retirement or even buying your first home. Brokerage accounts have fewer rules and more flexibility as to when and why you can withdraw profits from them.
Here we will explain the differences between the two in detail.
Roth IRA vs. Brokerage Account: Key Differences
There are significant differences between Roth IRAs and brokerage accounts in terms of eligibility, investment selection, and tax treatment of earnings withdrawals.
Income Requirements. Brokerage accounts are generally available to any adult with a Social Security number or tax identification number, regardless of income. On the other hand, to contribute to a Roth IRA, your income must be greater than zero and below certain Roth IRA income limits depending on your tax status. Contribution Limitations. While there is no limit to the amount you can put into a taxable brokerage account, Roth IRAs have annual contribution limits. In 2025, the maximum amount you can contribute to a Roth IRA is $7,000 if you’re under 50 and $8,000 if you’re 50 or older. Above a certain income level, Roth IRA contribution limits are reduced and Roth IRA contributions are fully permitted for single filers with a modified adjusted gross income of $165,000 or more or joint filers with a MAGI of $246,000 or more. It will disappear. Alternative Investment Selection. Investment options vary by provider for both brokerage accounts and Roth IRAs. However, certain types of alternative assets are not allowed in a Roth IRA, such as collectibles (art, stamps, antiques, etc.) and life insurance. Brokerage accounts are more likely to offer these assets, but many still do not. Earnings withdrawal rules. You can withdraw investment income from a Roth IRA only if you are 59 1/2 years of age or older, a first-time homebuyer, disabled, or the beneficiary of a deceased Roth IRA. Withdrawals that meet any of these conditions are tax-free as long as the account has been opened and funded for at least five years. Withdrawals of nonqualified profits are subject to income tax rates plus a 10% penalty. You can withdraw any funds, including earnings, from your brokerage account at any time, but selling your investments to withdraw your money may result in capital gains taxes.
What Roth IRAs and brokerage accounts have in common
The two account types have some features in common.
Donations are not tax deductible. Roth IRAs and taxable brokerage accounts are similar to traditional IRAs in some ways. There are no short-term tax benefits to putting money into a Roth IRA or brokerage account. Traditional IRA contributions may be tax deductible, but Roth IRA contributions, like contributions to a brokerage account, are not. Donations can be withdrawn at any time without penalty. Investors can withdraw money contributed to a Roth IRA at any time tax-free and penalty-free. There are also no penalties for withdrawing funds deposited in a brokerage account (although you may be subject to capital gains taxes, and withdrawals of Roth IRA earnings have different rules than withdrawals of contributions). Please keep in mind). You can open it online from a variety of providers. Both Roth IRAs and brokerage accounts are available from a wide range of providers, may offer a variety of features and investment choices, and typically offer an online application process.
What are the best uses for a Roth IRA?
Qualified Roth IRA withdrawals are tax-free at any age, as are withdrawals of up to $10,000 for a first-time home purchase. In either case, the Roth IRA must be open and funded for at least five years to be eligible to withdraw the earnings tax-free.
However, Roth IRAs are actually designed for retirement savings. Withdrawals for a first-time home purchase may be appropriate for some people, but opportunity costs need to be considered. If you take advantage of it too early, you could miss out on years of future tax-free growth.
You can also open a protective Roth IRA for your teen to get a head start on their long-term goals. Minors can contribute to a parent Roth IRA. Also, you can donate for minors too. Income from things like babysitting or part-time work is sufficient, and total annual contributions cannot exceed your income or the standard limit of $7,000 (whichever is less).
What are the best use cases for brokerage accounts?
Brokerage accounts don’t have the same tax benefits as Roth IRAs, but they are much more flexible when it comes to withdrawals. As a result, it may be suitable for goals other than retirement goals, such as investing in a major purchase in the next five or 10 years.
It may also serve as a supplemental retirement account, especially for those who are not eligible to contribute to a Roth IRA. Investments in brokerage accounts held for more than one year are taxed at long-term capital gains tax rates (0%, 15%, or 20%, depending on the income at the time of sale) when sold. This may be lower than the ordinary income tax rate at which traditional IRA distributions are taxed.
Should you use a brokerage account for short-term savings? That’s a complicated question. An oft-repeated adage is that you shouldn’t invest in stocks if you think you’ll need it within five years. If a bear market occurs, this guideline will give your investments time to recover in value.
Sam Taube writes for NerdWallet. Email: staube@nerdwallet.com.
The article “Roth IRA vs. Brokerage Account: What’s the Difference?” originally appeared on NerdWallet.
First published: January 22, 2025, 12:20pm EST
