Investing is one of the best ways to grow a retirement nest egg, and the first step in the process is selecting an investment account. Two common retirement investment account options are brokerage accounts and individual retirement accounts, or IRAs.
Investors can buy and sell stocks, bonds, exchange-traded funds and mutual funds in both IRAs and brokerage accounts, but IRAs have special tax rules and guidelines for contributions and withdrawals that investors need to fully understand.
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Here’s everything you need to know to use IRAs and brokerage accounts to maximize your investing returns:
— What is a brokerage account?
— What is an IRA?
— Choosing between an IRA and a brokerage account.
What Is a Brokerage Account?
A brokerage account is a basic investment account that has relatively few restrictions compared to IRAs and other retirement account types. Standard brokerage accounts have no contribution limits, restrictions on how the money is used or penalties associated with the timing or size of withdrawals. Brokerage account investors can trade stocks and other assets on margin, which is money borrowed from the brokerage to invest. Some brokerage accounts also provide access to certain assets that may not be available to retirement account investors, such as stock options.
While brokerage accounts provide investors with more freedom than IRAs, they are not tax-advantaged. Investors must pay taxes on any earnings generated in a brokerage account, including capital gains and dividends. Investors must pay capital gains taxes on profitable trades in the year they complete the sale, even if they keep the proceeds in the brokerage account or reinvest them.
The IRS taxes capital gains from a brokerage account based on how long an investor holds an asset before selling. Profits on assets held for one year or less are considered short-term capital gains and are taxed as ordinary income. Profits on assets held for more than a year are considered long-term capital gains and are taxed at lower rates of 0%, 15% or 20%, depending on an investor’s income. Some dividends, known as “qualified dividends,” are also taxed at long-term capital gains rates.
What Is an IRA?
An IRA is a type of retirement account investors can open with a bank or brokerage that provides tax advantages for retirement investors. The two main types of IRAs are traditional IRAs and Roth IRAs.
A traditional IRA is a tax-deferred investment account, meaning contributions may be tax-deductible in the year they are made. Investments in a traditional IRA grow tax-deferred, so investors can buy and sell stocks and other assets without paying capital gains taxes or taxes on dividends. However, withdrawals from a traditional IRA are taxed as ordinary income, based on the investor’s tax bracket at the time of withdrawal. Because many investors withdraw funds during retirement when their income is lower, they may pay a lower tax rate than they would have when they were working.
A Roth IRA is an after-tax retirement account. Contributions are not tax-deductible, but qualified withdrawals, including investment earnings, are completely tax-free. Investors can buy and sell assets within a Roth IRA without paying taxes on capital gains or dividends.
Aaron Brask, financial planner at Aaron Brask Capital, says IRAs offer investors tremendous tax advantages.
“In most cases, I find it is best to contribute money to an IRA when someone is working,” Brask says. “This contribution will reduce the taxable income in that year, and then you can take it out sometime down the road when you are not working and presumably in a lower tax bracket.” Keep in mind, however, that when it comes to Roth IRAs vs. traditional IRAs, only contributions to a traditional IRA will lower your taxable income; Roth IRA contributions do not.
There are also several other types of IRAs with unique rules and advantages. A SIMPLE IRA (Savings Incentive Match Plan for Employees) allows both employers and employees to contribute and is designed for small businesses. A SEP IRA (simplified employee pension) allows employers of any size to contribute to accounts set up for employees. A rollover IRA allows investors to move funds from an old employer-sponsored retirement plan, such as a 401(k), into an IRA without paying taxes or penalties. An inherited IRA is an IRA received from someone after they die. A self-directed IRA allows investors to buy certain alternative assets that traditional or Roth IRAs usually don’t allow, such as precious metals, real estate and tax lien certificates.
[Read: 7 Best Funds to Hold in a Roth IRA]
The two main disadvantages of IRA investing are contribution limits and access restrictions. In 2026, investors can contribute up to $7,500 to an IRA account. Those age 50 and older are allowed an additional $1,100 catch-up contribution for a total of $8,600.
While investors can withdraw their money from an IRA account at any time, withdrawals from a traditional IRA before age 59 1/2 usually incur a 10% early withdrawal penalty, in addition to any other taxes the investor owes on the withdrawal. There are certain exceptions to the early IRA withdrawal penalty, such as money withdrawn for a first-time home purchase, education expenses or disability. In a Roth IRA, you can withdraw previous contribution amounts at any time without paying taxes or penalties, but earnings may be subject to taxes and penalties if withdrawn early.
There are also qualification restrictions for different types of IRA accounts. You must have earned income to contribute to an IRA, and your total annual contributions must not exceed your income for the same year. Anyone with earned income can contribute to a traditional IRA, but if you (or your spouse) have a retirement plan at work, your tax deduction may be limited based on income. In 2026, single filers covered by a workplace plan can take the full deduction if their income is $81,000 or less, with a partial deduction up to $91,000. Married couples filing jointly can fully deduct up to $129,000, with a partial deduction up to $149,000.
Choosing Between an IRA and a Brokerage Account
Most retirement investors come out ahead in the long term when they prioritize IRA investing over investing in a brokerage account. In addition, investors who begin contributing to an IRA account at an earlier age will get more of a long-term benefit from their investments compounding tax-free over time.
An IRA may be a particularly attractive option to any worker who does not have a 401(k) or other employer-sponsored retirement plan.
Doug Carey, president and chartered financial analyst at WealthTrace, says investors should think about their personal financial goals before choosing between an IRA and a brokerage account.
“I have found that for the typical 30-year-old, they would have 20% more money by investing in an IRA vs. a brokerage account over a 20-year timeframe due to the tax savings and compounding effects,” Carey says.
However, Carey cautions that 30-year-old investors should understand that they will not be able to access any money they contribute to a traditional IRA without penalty for nearly 30 years.
“If this money will be needed soon for a purchase such as a home or car, then this money should not go into the IRA unless the owner will be 59 1/2 years old and able to access the money,” he says.
Daniel Gilham, managing director and certified financial planner at Farther, says investors who have brokerage, IRA and Roth IRA accounts have opportunities for intelligent asset allocation that can maximize returns.
“We recently assisted a family in reducing their ordinary dividends and interest income in a taxable brokerage account by 79% by moving fixed-income positions and mutual funds (which can distribute gains and yields without selling the positions) into IRAs while reallocating their taxable portfolio into individual municipal bonds, ETFs and single-stock positions,” Gilham says.
“Through thoughtful portfolio construction, asset allocation and asset location, investors can substantially reduce their taxable income,” Gilham says.
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Brokerage Account vs. IRA: Which Should You Invest In? originally appeared on usnews.com
Update 03/25/26: This story was published at an earlier date and has been updated with new information.
