Tax Benefits of a Brokerage Account vs. Roth IRA

by Rocco Pendola ; Updated April 19, 2017

One key difference between a standard brokerage account and a Roth IRA involves how the IRS treats earnings generated by the investments you hold. While capital gains, dividends and interest grow on a tax-deferred basis in a Roth, the flexibility of a taxable brokerage account could suit you better if you need to access your money prior to retirement without paying a penalty.


To be clear, your Roth IRA can be a brokerage account. When you initiate the account opening process at most financial institutions, they give you several options for how you would like to classify your account. If you select "Individual" or "Joint," most firms simply open up a standard, taxable brokerage account for you. If you select "Roth IRA," most firms categorize your account as an IRA for tax purposes, but allow you to operate the account just like a brokerage account. Generally, you cannot trade on margin, use options strategies that require margin and remove money from the account without facing IRA-related tax consequences.

Roth Tax Treatment

As you collect earnings -- capital gains, dividends and interest -- in a Roth IRA, you do not pay taxes on them annually. In fact, if you wait until you turn 59 1/2 and have held your Roth account for at least five years, the IRS will never tax your earnings. Refer to IRS Publication 590 to review instances where you can remove earnings tax-free prior to the 59 1/2 retirement age.

Standard Brokerage Tax Treatment

As you buy and sell stock for capital gains, collect dividends and generate interest in a standard individual or joint account, your brokerage keeps track of this activity. At the end of the year, it sends tax forms reporting these transactions and earnings to the IRS. You receive copies of each of these forms. The IRS expects you to report this activity when you complete your tax filing and pay the applicable taxes. With a Roth IRA, you do not have to concern yourself with this type of account, given the account's tax-deferred status.


Ultimately, your individual circumstances determine which type of account works best for you. You might require both a standard brokerage account and a Roth IRA. Generally, it makes sense to keep money you would like to access without penalty prior to retirement in a standard brokerage account. If you do not intend to touch your retirement nest egg until age 59 1/2, a Roth IRA or other type of retirement account is likely the best option.

About the Author

As a writer since 2002, Rocco Pendola has published numerous academic and popular articles in addition to working as a freelance grant writer and researcher. His work has appeared on SFGate and Planetizen and in the journals "Environment & Behavior" and "Health and Place." Pendola has a Bachelor of Arts in urban studies from San Francisco State University.