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January is a great time to start working toward your financial goals. If you’re looking to start investing, the first step is to open an investment account. But which kind of account is right for you?
Roth IRAs have tax advantages that make them useful for long-term savings goals such as retirement or, in certain cases, first-time home purchases. Brokerage accounts have fewer rules and more flexibility around when and why you can withdraw profits from them.
Here’s a breakdown of the differences between the two.
Roth IRAs vs. brokerage accounts: the major differences
There are big differences between Roth IRAs and brokerage accounts in terms of eligibility, investment selection and the tax treatment of earnings withdrawals.
Income requirements. Brokerage accounts are generally available to any adult with a Social Security number or taxpayer identification number, regardless of income. To contribute to a Roth IRA, on the other hand, your income must be greater than zero but less than certain Roth IRA income limits, which depend on your tax status.
Contribution limits. There’s no limit on how much money you can put into a taxable brokerage account, but Roth IRAs have maximum annual contributions. For 2025, the maximum contribution you can make to a Roth IRA is $7,000 for those under age 50, and $8,000 for those 50 or over. Above a certain income level, the Roth IRA contribution limit is reduced, and Roth IRA contributions are disallowed entirely for single filers with a modified adjusted gross income of $165,000 or more, or joint filers with MAGI of $246,000 or more.
Alternative investment selection. Investment choices vary from provider to provider for both brokerage accounts and Roth IRAs. However, certain types of alternative assets, such as collectibles (e.g., artwork, stamps or antiques) and life insurance, are not allowed in a Roth IRA. Brokerage accounts are more likely to offer these assets, although many still don’t.
Earnings withdrawal rules. You can only withdraw investment earnings from a Roth IRA if you are over age 59 ½, a first-time homebuyer, disabled, or the beneficiary of a deceased person’s Roth IRA. Withdrawals that meet one of these conditions are tax-free, as long as the account has been open and funded for at least five years. Unqualified earnings withdrawals are subject to income tax rates plus a 10% penalty. You can withdraw any funds, including earnings, from a brokerage account at any time, although selling investments in order to withdraw money may generate a capital gains tax liability.
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What Roth IRAs have in common with brokerage accounts
The two account types do share a few features:
Contributions are not tax-deductible. Roth IRAs and taxable brokerage accounts are similar in the way they differ from traditional IRAs: There is no short-term tax incentive for putting money into a Roth IRA or brokerage account. Traditional IRA contributions may be tax-deductible, but Roth IRA contributions, like brokerage account contributions, are not.
Contributions can be withdrawn at any time without penalty. Investors can withdraw the amount they’ve contributed to a Roth IRA tax-free and penalty-free at any time. There’s also no penalty to withdraw money you’ve put into a brokerage account (though you still might be on the hook for capital gains taxes, and remember that withdrawals of Roth IRA earnings have different rules than withdrawals of contributions).
Can be opened online from a variety of providers. Roth IRAs and brokerage accounts are both available from a wide range of providers, which may offer different features and investment selections and typically offer online application processes.
What are the best use cases for a Roth IRA?
Qualified Roth IRA withdrawals are tax-free, as are up to $10,000 in withdrawals for a first-time home purchase at any age. In both cases, the Roth IRA must have been open and funded for at least five years to be eligible for tax-free earnings withdrawals.
However, Roth IRAs are really designed for retirement savings. Withdrawals for a first-time home purchase may be right for some, but they have an opportunity cost to consider — you may miss out on many years of future tax-free growth if you tap into it too early.
You can also open a custodial Roth IRA for a teen to give them a head start on long-term goals. A minor can contribute to a custodial Roth IRA, or you can contribute for them. They just need to have earned income, such as from babysitting or a part-time job, and the total annual contribution cannot exceed their income or the standard limit of $7,000 (whichever is less).
What are the best use cases for a brokerage account?
Brokerage accounts don’t enjoy the same tax advantages as Roth IRAs, but they offer much more flexibility on withdrawals. As a result, they may be better-suited for non-retirement goals, such as investing for a big purchase in the next five or ten years.
They may also be useful as a supplemental retirement account, especially for people who are not eligible to contribute to a Roth IRA. Investments in a brokerage account that are held for more than one year are taxed at long-term capital gains rates upon sale — 0%, 15% or 20%, depending on your income at the time of sale. That may be be lower than the ordinary income rates 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 should not invest money in stocks if you think you’ll need it within five years. In the event of a bear market, this guideline can give your investments time to recover their value.
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