According to statistics from the Investment Company Institute, IRAs have enjoyed a 10% growth rate each year and are now worth over $5 trillion dollars.
IRAs are a popular and effective way to save and invest money. At the same time, they are complex enough that it can be difficult to understand exactly how they work. In particular, they are often mixed up with brokerage accounts.
Read on to learn about brokerage accounts vs IRAs and better understand the difference!
Brokerage Accounts vs IRAs
One of the reasons that brokerage accounts and IRAs are so easily mixed up is because they function almost identically. In fact, if someone were to describe a brokerage account and IRA to you, you might not be able to tell which was which.
The differences between brokerage accounts and IRAs basically come down to their purpose rather than their function. IRA stands for investment retirement account, so it’s designed to grow your savings into a nest egg you can retire on. A brokerage account is also designed to grow your savings, the only difference being that the money may not be explicitly intended for retirement.
Now, you might think, if those are all the IRA and brokerage account differences, then does it really matter which one you get? Because of the different purposes of the two types of investments, they have a few different rules, so it does matter which one you choose.
How Is a Brokerage Account Different?
Brokerage accounts are about growing your wealth. People who buy them can remove their money from the account more or less at any time. This provides a lot of flexibility.
At the same time, like other ways of making money, the government takes a cut. If you profit off of a brokerage account, that profit is called “capital gains.” Your capital gains will be subject to the capital gains tax.
On top of that, brokerage account investments do not receive any tax advantages.
The Advantages of IRAs
The government wants to encourage people to prepare for their retirement. As a result, they provide several incentives to invest in IRAs.
IRA investments can be tax-free if done properly. As long as you’re not withdrawing money early, you can actually avoid paying taxes on income that you place in an IRA.
On top of that, when the time comes to withdraw your money in retirement, you won’t be taxed on it! Even though your money may have grown by a significant amount, that profit will be yours to keep.
The only downside to IRAs are that they are designed to be used in retirement. While you technically can take your retirement money out early, you’ll pay a penalty to the IRS to do so. As long as you intend to let the money sit and grow for your retirement, IRAs are the way to go!
Apply Your Knowledge of Brokerage Accounts vs IRAs
We hope you learned something helpful about brokerage accounts vs IRAs in this brief review of them. To learn more about how you can make the most out of investing in IRAs and the benefits of alternative investments, get in touch with us here.