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Brokerage Account vs. IRA

DIY investment success requires:

  1. Time
  2. Effort
  3. Money

Unfortunately, thousands of individuals feel they don’t have any of the three at their disposal, especially time. How about effort?

Unfortunately, for most people, the dizzying array of choices make it tough to even know where to start. This is where a brokerage firm comes in handy, as it can do all the pre-research and initial grunt work on your behalf and manage your investments.

What's a brokerage account?

A brokerage account is an account an investor maintains with a licensed brokerage firm which allows you to buy and sell financial assets such as stocks, bonds, mutual funds, currencies, futures, options, etc.

An investor deposits funds with the brokerage firm to maintain either a cash or margin account. Once a client places an order with the firm, the latter executes it on investors’ behalf in return for compensation, which is called commission.

A broker can be a traditional full-service broker or a discount broker, depending on whether it offers a full range of investment services and is more personalized or acts merely as a platform to route your buy-and-sell orders. 

The discount broker typically provides free research and tools as add-ons to its service. Some of the services offered by a full-service broker include financial planning, investing, retirement planning, tax advice and regular portfolio updates.

Consequently, the fee/commission associated with a full service broker is higher compared to the commissions due to the discount broker.

What's an IRA?

An IRA, or individual retirement account, is a type of savings vehicle specifically earmarked for retirement.. An IRA can be further categorized into a traditional IRA or Roth IRA. The difference between them is the tax treatment associated with each.

A traditional IRA allows tax deductions for contributions toward the account, and the taxes are deferred on the potential investment earnings until the funds are withdrawn.

Deductions for Roth IRA contributions are not allowed, and investment earnings will be distributed tax-free at the time of retirement. You’ll need to opt for a traditional IRA if your income is too high or if you expect to be in a lower tax bracket at the time of retirement.

Types of IRA Accounts

A brokerage account is maintained just like a savings account you’d have at a bank. However, your money with the brokerage account has the opportunity to grow more quickly,  as it is invested in financial assets. Thus, a brokerage account is more growth-oriented. An IRA can also be designated a trust or custodial account for minors.

A custodial IRA

This is a type of retirement account that can be set up for your child. Through investing for retirement at an early age, kids have the benefit of compound interest on their side. One way you can do this is to set up a custodial IRA for your child. If your child works and earns money before he or she is an adult, he/she can put some of this money into a custodial IRA.

An IRA trust

This is an excellent option If you have a lot of money stashed in an IRA. It’s recommended that you set up a revocable living trust, designed to be the beneficiary of your IRA after you die. To back up all the way, IRAs are protected from the claims of creditors while you, the IRA account owner, is living. However, once you die and the IRA assets are given to a beneficiary, the IRA assets lose their protected status.  

That’s the reason an IRA Trust should be set up, as it will be protected from creditors, swindlers and lawsuits as long as the funds remain inside the trust.

Restrictions on investment amount

The amount earmarked for investment held in a brokerage account has no ceilings or restrictions. Meanwhile,  IRAs have restrictions on the investment amount. In 2018, Roth and traditional IRA investors  50 years and under are eligible to contribute up to $5,500 for the tax year, and those over 50 can contribute $6,500, including an additional $1,000 catch-up contribution.

Brokerage Account vs. IRA: Tax Treatment

A regular brokerage account doesn’t offer any tax benefits. The interest and dividends received are usually taxable in the year they accrue. Any earnings on the sales of an investment attracts capital gains tax. On the other hand, when there is a capital loss, a brokerage account permits you receive a tax break.

As discussed earlier, traditional IRA contributions are tax-deductible on tax returns for the year, while withdrawals during retirement are taxed at ordinary income tax rates.

On the contrary, contributions to Roth IRA are not tax deductible but earnings and withdrawals are usually tax-free. Thus, interest, dividends, capital gains and any other income that accrue along the way are free taxation. Also, only the amount that goes into a Roth IRA account is taxed, not the sum that is eventually received.

Brokerage Account vs. IRA: Liquidation Period

It’s mandated that traditional IRA investors withdraw a certain percentage of funds at age 70½, whether you need it or not. Meanwhile, Roth IRAs do not have a mandatory withdrawal amount and contributions can continue to grow tax-free.

Penalty-free qualified distributions can be taken from the age of 59½ for both traditional and Roth IRAs, although to avoid tax payment, a Roth IRA requires the first contribution to be made to the account at least five years before the first withdrawal. The penalty for early withdrawal (before 59½ years) is 10 percent.

Pros of an IRA

  • You can defer paying taxes on IRA gains, which allows your finances to grow at a faster rate than a brokerage account.
  • Traditional IRAs allow individuals to save who are in a higher income tax bracket.
  • An IRA is a better bet when your goal is to build wealth slowly, rather than to generate immediate additional cash flow.

Pros of a Brokerage Account

  • Brokerage accounts allow some control over when you pay capital gains, as you can decide when to liquidate an investment asset.
  • There is no restriction on the timing of liquidation or withdrawal of the amount of money in an account.
  • No penalty is levied on early use of the investments held in the account.
  • One can earn tax breaks on  stocks that have depreciated in value by recognizing a tax loss.

Check out a few of our top picks for online brokerages below.

Broker Best For Commissions Account Minimum Choose your platform
Ally Investment
  • Active traders
  • Beginners looking to start trading
  • Low fees
$0 $0
Get started securely through Ally Investment's website
1 Minute Review

If investors are on the hunt for a bargain broker, Ally Invest could be the one. With low commissions across the board, Ally Invest (formerly TradeKing) stops potential investors in their tracks with its especially low mutual fund commissions. Commissions on stocks and ETFs are notoriously inexpensive as well, and for more active traders or those with larger account balances, commissions are now $0.

Pros
  • Volume discounts available
  • Among the lowest fees in industry
  • Good for every experience level
  • Excellent customer service
Cons
  • Lacks physical locations
Current Promotion

$3.95 per stock trade for Active Traders at Ally Invest

TD Ameritrade
  • Beginner investors
  • Advanced traders
  • Investors who want portfolio-building advice.
$0 $6.95 for OTC Stocks $0
Get started securely through TD Ameritrade's website
1 Minute Review

This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.

Pros
  • Superior technology
  • No account minimum balance
  • Excellent customer support
  • Premier data and news partnerships
Cons
  • Slightly higher commissions
  • Can be for more advanced users
Current Promotion

Trade commission–free for 90 days & get up to $2500

eTrade
  • Mobile traders
  • Traders looking for research and data
  • Investors looking for retirement planning guidance
$0 $0
Get started securely through eTrade's website
1 Minute Review

E-Trade is best known for its user-friendly browser, desktop and mobile trading platforms and its extensive research and educational information. E-Trade may not have the lowest commissions compared to discount online brokers, but customers certainly get their money’s worth from E-Trade’s comprehensive offerings.

Pros
  • Extensive resources
  • Full banking services
  • Easy-to-use platforms
Cons
  • Limited access to ETrade Pro
  • Higher commissions than discount brokers
Current Promotion

60 days of commission-free trades with deposit of $10,000 or more

Interactive Brokers
  • Forex traders
  • Professional traders
  • Frequent traders with a thirst for different order types (63!)
$0.005 per share minimum $1 and maximum 0.5% of trade value; volume discount available $0 for cash account, or a margin account with $2,000
Get started securely through Interactive Brokers's website
1 Minute Review

If you consider yourself a sure-footed professional trader, Interactive Brokers might be a major possibility for you, particularly if you’re adept at navigating tricky trading platforms (can you say 124 option indicators?) or have done more than just dipped your toe a “coupla times” into the complex world of international markets.

Pros
  • If you’re into trading on margin, you’re in luck. Interactive Brokers offers the lowest rates in the industry.
  • Low pay-per-share commissions on stock trades (up to 1,000 shares) and on options trades (up to 20 contracts)
  • Vast order types options for professional traders
Cons
  • Interactive Brokers charges account fees (including annual, transfer, closing an inactivity fees) and offers an extremely complex trading platform
Current Promotion

Lower minimum activity requirements ($3/month) and opening account minimum requirement ($3,000) for clients 25 and younger.

Final Thoughts

Deciding where you should put your money comes down to assessing your immediate and future financial goals. Depending on how fast you would need your money to grow and your risk tolerance are just a few factors to consider.

Ready to start investing in your future? Benzinga breaks down how to open your IRA account.

Compare Online Brokers
Broker Commission Account Min Get Started

$0 $6.95 for OTC Stocks $0 Learn More

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