Brokerage Account vs. IRA: Where Should My Money Go?

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Not sure which type of account to invest in? Read on to see how to allocate your money. 

If you have money you might need for emergency expenses, it’s best to keep that cash tucked away in a savings account. But if you have extra money beyond that and you’re hoping to invest it, then your best bet may be to put it in a brokerage account or IRA where you can grow it into a larger sum. The question is, which is the better choice?

The difference between a brokerage account and an IRA

A brokerage account lets you invest for any purpose, and you can invest any amount of money you want within a given year. You can also take withdrawals from your brokerage account at any time without penalty.

IRA accounts work differently. With an IRA, you’re getting a tax break on the money you put into your account — meaning, your contribution is tax-free. You also get to enjoy tax-deferred growth in your IRA, so you don’t pay taxes on gains year after year like you would with a regular brokerage account. You simply get taxed on withdrawals when you take them.

Because IRAs are supposed to serve as retirement savings plans (“IRA” actually stands for “individual retirement account”), there are rules you need to follow. You can only contribute a specific amount of money each year — currently, the limit is $6,500 for savers under the age of 50 and $7,500 for savers 50 and over. You also can’t remove funds from an IRA prior to age 59½, and if you do, you’ll generally face a 10% early withdrawal penalty.

Clearly, regular brokerage accounts are a lot more flexible than IRAs. So if you’re not sure which option to invest in, you’ll need to ask yourself what you’re investing for.

How much flexibility do you need?

If you want to invest money specifically for retirement, then an IRA is generally your best option due to the tax breaks involved. But to be clear, you can also use a regular brokerage account to invest for retirement — you just won’t get the tax benefits.

You may, however, want the option to cash out portions of your portfolio prior to retirement. Maybe you expect to pull funds to pay for your kids’ college. Or maybe you want more leeway to take your money out for other purposes, whether it’s to buy a car or invest in a rental property. Either way, a brokerage account is going to give you the most flexibility with your money. So if that’s important to you, then it may be worth it to you to give up some tax breaks in exchange.

Of course, one thing you could always do is try to max out your IRA contribution for the year and then invest funds beyond that in a brokerage account. That essentially gives you the best of both worlds. And if you can’t afford to max out an IRA and fund a brokerage account, you may want to then take whatever money you have to invest and split it half, putting 50% into an IRA and 50% into a brokerage account.

An IRA is a great retirement savings tool, but it limits you in many ways. So if you feel that sticking to an IRA will mean risking penalties, then you may be better off giving up some tax breaks and going with a regular brokerage account instead.

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