An important step in helping your money work for you is to pick the best investment account based on your goals. A Roth IRA and a taxable brokerage account are 2 types of investment accounts. What should you understand about a Roth IRA vs. a taxable brokerage account? Here’s what to know about them and how to determine which account will help you hit your financial goals.
What is a Roth IRA?
A Roth IRA is an individual retirement account (IRA) designed to help people save and invest for retirement in a tax-advantaged way. Once you contribute after-tax dollars to a Roth IRA, you could invest in stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other securities. Certain withdrawals could be tax-free depending on when you make them and what you use the money for.1 For example, a Roth IRA allows withdrawals of your contributions at any time without taxes or penalties.
What is a brokerage account?
A taxable brokerage account is an investment account. While you can use a taxable brokerage account to save for retirement, you could also use it for shorter-term financial goals, like saving for a house down payment, generating passive income, and building up a vacation fund. It also offers access to a wide range of investment types. Capital gains, aka profits from selling investments, are taxed in the year you earn them, as is any income earned, even if you reinvest those earnings.
Key similarities between Roth IRAs and brokerage accounts
Potential growth from compounding
Your investments may benefit from the power of compounding, which is when the gains you earn on an investment make gains of their own. Essentially, you get a return on that initial investment—known as the principal—and then additional returns on the gains being added to your account balance over time.
Flexible investment selection
Both a Roth IRA and a taxable brokerage account could offer a wide investment selection. You can choose from any of the stocks, bonds, mutual funds, ETFs, and CDs available at the financial institution hosting your account. In comparison, with a workplace retirement plan such as a 401(k), you may have more limited options for investments compared to individual retirement accounts.
No upfront tax deduction
You don’t get a tax deduction for adding money to a Roth IRA or for making a deposit to a taxable brokerage account. If your income qualifies, or your employer doesn’t offer a workplace savings plan, and you want to save money on taxes upfront, you may be able to make tax-deductible contributions to a traditional IRA.
Investment risk
All investing comes with the risk of loss. While the stock market has historically recovered from dips and has continued growing, past performance doesn’t guarantee future results, and weathering downturns and at least short-term losses is a normal part of investing.
No required minimum distributions
Certain types of retirement accounts require you to make withdrawals when you reach a certain age, whether you plan to use the money or not. These are called required minimum distributions, or RMDs. Roth IRA and taxable brokerage accounts don’t have RMDs, so if you retire with plenty of savings and other income, you may want to let that money continue to potentially grow in your IRA or investment accounts to build a future inheritance for loved ones.
Key differences between brokerage accounts and Roth IRAs
While a brokerage account and a Roth IRA share many similarities, there are also some significant differences:
Taxes
Investment earnings, including capital gains, dividends, and interest (except for Unrelated Business Taxable Income (UBTI)) aren’t taxed while the money remains in a Roth IRA. This is an advantage compared to a taxable brokerage account.
If you sell an investment in a taxable brokerage account, you’d potentially owe capital gains taxes on the investment if you sold it for more than what you bought it for. You would also potentially owe taxes on any dividends, taxable interest, or capital gains distributions from your investments, even if you opt to reinvest them rather than receive them in cash. With a Roth IRA, withdrawals of contributions are always tax-free. Withdrawals of earnings may be tax-free, known as qualified withdrawals, if they meet certain criteria.1
Annual contribution limits
Taxable brokerage accounts don’t have a contribution limit. You can deposit as much cash or shares as you want.
In 2025, the annual contribution limit for IRAs, including Roth and traditional IRAs, is $7,000. If you’re age 50 or older, you can contribute an additional $1,000 annually.
Early withdrawal penalties
Any investment earnings you withdraw from your Roth IRA before age 59½ may be subject to applicable income taxes and a 10% early withdrawal penalty. If you haven’t yet reached age 59½, there are a few exceptions to the early withdrawal penalty though, like withdrawing up to $10,000 to buy your first home, paying for health insurance while unemployed, or covering expenses related to a disability. You’ll be penalized if you withdraw from an account less than 5 years old. What’s more, even if you’re 59½ or older, you may still owe income tax (but won’t be subject to penalties) if you didn’t first contribute to a Roth account at least 5 years before you withdraw from that Roth IRA. This penalty is known as the 5-year rule.
Taxable brokerage accounts don’t have these restrictions. You can cash out your money whenever you want, but you will owe income tax on any gains in the year in which they’re realized (or investment earnings like dividends and interest in the year they are paid to you), regardless of whether you withdraw them or not.
Eligibility
For 2025, you can make full contributions to your Roth IRA if your modified adjusted gross income (MAGI) is less than $150,000 for a single adult and $236,000 if married and filing jointly.
If your MAGI is over that amount, you could consider a backdoor Roth IRA strategy, though it may not make sense for everyone, particularly those who have large amounts of previous traditional IRA contributions they deducted from their taxes. If you’re evaluating the strategy, it’s always a good idea to consult with a tax professional to discuss the timing, the potential tax impact, and the individual steps involved in a backdoor contribution. Those ineligible for Roth IRAs may also consider accessing a Roth’s advantages through a workplace plan, like a Roth 401(k) or Roth 403(b), that doesn’t have income restrictions.
A taxable brokerage account never has income limits, so you can open and make deposits to one no matter how much you earn.
Advanced trading strategies
A taxable brokerage account could let you trade on margin—or borrow money to invest—and sell short, which is when you try to make money as an investment’s price falls. Plus, if approved, it could allow you to use any options trading strategy—when you buy or sell a contract to buy or sell an investment at a certain price by a set time. These strategies tend to be more limited in Roth IRAs but limited margin trading may be available as long as you meet the eligibility requirements and read and agree to a limited margin account supplement.
Brokerage account vs. Roth IRA at a glance
| Roth IRA | Brokerage account | |
|---|---|---|
| Taxes on investment earnings | Tax-free while in the account | Taxes owed each year on any realized capital gains, dividends, and interest, even if reinvested |
| Taxes on withdrawals | Tax-free withdrawals, even on gains, starting at age 59½1 | No, withdrawals are tax-free at all times |
| Annual contribution limit | $7,000 per year, $8,000 for those age 50 and older | No limit |
| Penalty on early withdrawals | Yes, before age 59½ if withdrawal isn’t qualified1 | No, withdrawals are penalty-free at all times |
| Income restrictions | Yes | No |
| Advanced trading strategies | Limited | Yes |
How to decide if a Roth IRA or brokerage account is right for you
A Roth IRA could make more sense than a taxable brokerage account if you’re saving specifically for retirement because of the tax advantages on the earnings on your contributions plus withdrawals of contributions after age 59½. But you’d need to fall below the income limits to contribute to a Roth IRA or consider a backdoor Roth IRA or Roth 401(k), if it’s available through your plan. A brokerage account could make more sense than a Roth IRA if you’re targeting financial goals before retirement—or if you want to retire before age 59½—or if you want to use more advanced investing strategies.
The good news is that you don’t have to choose. You are allowed to open and contribute to both a Roth IRA and brokerage account, provided your income is under the limit for a Roth IRA and you’re not exceeding annual contribution limits on the Roth IRA. If you’re able to, you could consider maxing out annual contributions to a Roth IRA and then saving more in a brokerage account. Here’s how to open a brokerage account and Roth IRA.