Brokerage account vs. IRA: Key differences explained
Achieving long-term wealth growth is a fundamental objective of investing. Understanding the differences between an individual brokerage account and an Individual Retirement Account (IRA) is crucial for managing your financial goals. These accounts offer unique advantages and trade-offs, and selecting the right one for your portfolio depends on your goals, tax situation, and timeline.
What is the main difference between brokerage and IRA accounts?
The main difference between an individual brokerage account and an Individual Retirement Account (IRA) is tax treatment. An individual brokerage account is a taxable investment account offering liquidity and no contribution limits. An IRA offers tax-deferred or tax-free growth for retirement but carries strict annual contribution limits and penalties for early withdrawals.
Comparison Chart: Brokerage vs. IRA Account
| Feature | Brokerage Account | IRA (Traditional/Roth) |
| Tax Status | Taxable (capital gains, dividends & interest apply) | Tax-advantaged (tax-deferred or tax-free growth) |
| Contribution Limit | Unlimited | Capped (2025 – $7,000 for individuals under age 50, $8,000 for individuals age 50 or older. 2026 – $7,500 for individuals under age 50, $8,600 for individuals age 50 or older) |
| Withdrawal Rules | Anytime (no penalty) | Restricted (10% penalty before age 59½) |
| Primary Use | Short-to-long term goals & liquidity | Long-term retirement savings |
| RMDs? | None | Yes (Traditional only, starting age 73) |
What is a brokerage account?
An individual brokerage account is a type of investment account that you can open with a broker, brokerage firm, or financial platform. With an individual brokerage account, you can buy securities like stocks and bonds and investment funds like mutual funds and ETFs.
On M1, this looks like our individual, joint, or custodial brokerage accounts. Clients can create their own pies or select from pre-built pies.
Advantages of a brokerage account
Investors typically use individual brokerage accounts to help them meet financial goals. Some may also use them for building long-term wealth or for day trading depending on one’s needs.
- Flexibility & Liquidity: Individual brokerage accounts offer more flexibility because the funds can be withdrawn at any time without penalty.
- No Contribution Limits: Unlike an IRA, individual brokerage accounts have no limits on annual contributions. You can invest as much as you want.
Brokerage Account Taxes
The trade-off for the flexibility that individual brokerage accounts offer is fewer tax benefits. Individual brokerage accounts are taxed in three ways:
- Capital gains tax: When you sell stocks or other securities for a profit, you are subject to capital gains tax. The tax rate for long-term capital gains (assets held for more than one year) is typically lower than the rate for short-term gains (assets held for one year or less).
- Dividend tax: If you receive dividends, you could be subject to dividend tax. Ordinary dividends are taxable as ordinary income; qualified dividends are taxed at lower capital gain rates.
- Interest income tax: If you earn interest on cash held in your individual brokerage account, it is typically taxed at your ordinary income tax rate.
In addition, you make contributions to an individual brokerage account using after-tax dollars, meaning dollars on which you already paid income tax.
Open your brokerage account or IRA with M1 and start your wealth-building journey today. Our automated tools put the controls in your hands.
What is an IRA?
An IRA, or individual retirement account, is a retirement savings account designed to help users save for retirement. You can open with a brokerage firm or other financial platform. Two of the most important types of IRAs are traditional IRAs and Roth IRAs.
For frequently asked questions and the latest information, visit the IRS FAQ.
Traditional IRA
A traditional IRA allows individuals to contribute pre-tax dollars, depending on your eligibility. The account grows tax-deferred, meaning that an individual typically won’t owe taxes on it until they withdraw the money from the account.
- Contribution Limits:
- For the 2025 tax year, the contribution limit is $7,000 (or $8,000 if you’re age 50 or older).
- For the 2026 tax year, the contribution limit is $7,500 (or $8,600 for age 50+).
- Withdrawal Rules: Individuals pay income tax on IRA withdrawals. If you withdraw before age 59½, you may face a 10% penalty. Individuals are also subject to Required Minimum Distributions (RMDs) starting at age 73.
On M1, clients can open up traditional IRAs and create their own pies or select from Model Portfolios.
Roth IRA
A Roth IRA allows individuals to make after-tax contributions. However, when you withdraw the money during retirement, you won’t owe any taxes on your investment earnings or contributions.
- Tax-Free Withdrawals: When individuals withdraw the money during retirement (after age 59½ and holding the account for 5 years), you won’t owe any taxes on your Roth IRA investment earnings or contributions.
- Income Limits: There are income limits to contribute to a Roth IRA. For example, single filers earning over $165,000 in 2025 or over $168,000 in 2026 may not be eligible to contribute directly. For married couples filing jointly, the upper limits are $246,000 in 2025 and $252,000 in 2026.
- No RMDs: Roth IRAs do not require you to take RMDs (unless you inherited the Roth IRA account from a non-spouse), which can give you more flexibility in retirement.
M1 offers Roth IRAs where clients can create their own pies or select from Model Portfolios.
The M1 line
Choosing the right investment account is crucial in achieving long-term wealth growth, and both individual brokerage accounts and IRAs have unique advantages and drawbacks that can suit different investment goals, tax situations, and timelines.
An individual brokerage account allows for flexibility and could potentially be suitable for day trading, financial goal saving, and long-term investing, while IRAs, including traditional and Roth IRAs, are mainly used as retirement savings accounts and offer tax benefits.
It’s essential to understand the tax rules and restrictions of each investment account to grow wealth effectively. With this knowledge, investors are better prepared to make informed decisions on which or both investment accounts are suitable for their long-term financial plan.
Brokerage & IRA Frequently Asked Questions
Yes, individuals can hold and contribute to both account types in the same tax year. Contributions to an IRA are subject to an annual limit, while contributions to a taxable individual brokerage account are unlimited.
No. Unlike an IRA, which typically imposes a 10% penalty on withdrawals made before age 59½, an individual brokerage account allows account holders to liquidate assets and withdraw cash at any time without penalty. However, selling investments to generate cash is a taxable event.
No. In a standard individual brokerage account, realized capital gains, dividends, and interest are generally taxable in the year they are received. In contrast, Traditional IRAs offer tax-deferred growth, meaning taxes on investment earnings are not due until funds are withdrawn in retirement.
No. The IRS prohibits the direct transfer of securities (in-kind contributions) from a taxable individual brokerage account to an IRA. Individuals must sell the assets in the individual brokerage account first, contribute the cash proceeds to the IRA, and then repurchase securities, subject to annual contribution limits.
Yes. While individual brokerage accounts do not offer the specific tax advantages of an IRA (such as tax-free or tax-deferred growth), they are often utilized for long-term investing because they have no contribution limits and no Required Minimum Distributions (RMDs) during the account holder’s lifetime.
DISCLOSURES:
M1 and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
All investing involves risk, including the risk of losing the money you invest. Brokerage products and services are offered by M1 Finance LLC, Member FINRA / SIPC, and a wholly owned subsidiary of M1 Holdings, Inc.
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