Your individual retirement account and your brokerage account might look alike, but they serve distinct purposes in your overall financial plan. Congress authorized IRAs to give you a tax-advantaged means of saving toward your retirement. You can hold a number of investments in your brokerage account that are identical to those in your IRA. You won't get the tax advantages offer by an IRA, but you won't be subject to the restrictions imposed on such accounts either.
Account vs. Investment
A brokerage account and an IRA have one major feature in common: They are accounts that hold investments, but they are not investments. You can't buy an IRA or a brokerage account. You must open an IRA or brokerage account, then use those accounts to buy financial products, such as bank certificates of deposit, stocks, bonds, mutual fund shares or real estate investment trusts.
Custodial vs. Personal
An IRA account must be either a custodial or trust account. The account custodian or trustee might be a bank, credit union, insurance company, mutual fund, investments brokerage firm or other organization approved by the Internal Revenue Service. The amount of money you can contribute to your IRA each year is limited. A brokerage account is a personal account that you open with an investments brokerage firm that allows you to buy a variety of securities. The law imposes no limit on how much you can invest through your brokerage account.
All investments in your personal brokerage account are subject to state, local and federal income taxes. Different kinds of investments incur different kinds of taxes. For example, interest and dividends might be taxed as ordinary income, while profits from trading securities in your brokerage account might qualify for the more advantageous long-term capital gains tax rate. Interest from municipal bonds held in your brokerage account might not be taxed at all, and you can use losses from trades to offset other investment gains.
Income produced by investments inside your IRA is not taxed as long as the funds remain in your IRA. Withdrawals from your IRA might be subject to taxation, depending on a number of factors, including whether the account is a traditional IRA or a Roth IRA, your age and how long the funds have been in your IRA.
The types of investments you can hold in your brokerage account are limited by your brokerage firm and the type of account you open. For example, you must have an options account before you can trade options in your brokerage account. The types of investments you can hold in your IRA are also limited by the custodian or trustee who holds your account. For example, if your trustee is your local bank, it might only offer bank products, such as certificates of deposit or money market accounts. Your IRA is also limited by IRS regulations, which prohibit certain products in IRAs, such as life insurance and collectibles.
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