What’s the Difference Between a Brokerage Account and a Retirement Account?
In general, the primary difference between a brokerage account and a retirement account lies in how and when you pay taxes.
Brokerage Account
A brokerage account, also known as an investment account, is a taxable account. This means that the IRS tracks your transactions, taxing you on any gains or losses as they occur. Each time you buy or sell an investment within this account, it is considered a taxable event. These accounts provide the most flexibility, allowing you to deposit and withdraw funds as you please.
Retirement Accounts
In contrast, retirement accounts are classified as tax-advantaged accounts. The IRS offers certain tax benefits, but these come with specific rules, including limits on contributions and withdrawal rules. As I like to say, the IRS wants their money—they'll get it now or later.
With a Roth retirement account, you pay taxes upfront, which can set you up for tax-free withdrawals in the future. Contributions to a Roth are made with after-tax dollars (for example, if you’re a W-2 employee, you’re contributing from your net income, which is your income after taxes and deductions). Once you meet certain conditions, you can withdraw both your contributions and any earnings tax-free. You can identify Roth accounts because they have “Roth" in their names; such as Roth 401(k), Roth IRA, Roth 403(b), and Roth 457(b).
Conversely, with a Traditional retirement account, you defer taxes now, expecting to pay them later. The IRS allows you to contribute pre-tax or tax deductible money (for example, W-2 employees contributions come from your gross income, which is your income before taxes and deductions), deferring taxes until you withdraw funds from the account. You pay taxes on your money in the future, as you withdraw it. You can identify Traditional retirement accounts because they just include the account type in their names; such as 401(k), IRA, 403(b), and 457(b).
In Summary
The main differences between brokerage accounts and retirement accounts lie in tax treatment, contribution limits, and withdrawal rules. These distinctions can significantly impact your investment, accumulation, and distribution strategies. For assistance in developing a strategy that aligns with your goals and values, schedule a complimentary consultation.
