Is an IRA Considered a Brokerage Account or Something Else?

Individual Retirement Accounts (IRAs) and brokerage accounts both serve as investment vehicles, but they differ in purpose and regulations. Brokerage accounts allow general investing without tax advantages, while IRAs are designed for retirement savings, often with tax benefits. These differences influence how they are structured, taxed, and regulated.

Typical IRA Structures

IRAs come in several forms, each with specific rules on contributions, withdrawals, and tax treatment. The right choice depends on factors like income, employment status, and retirement goals.

Traditional IRA

A Traditional IRA allows contributions with pre-tax income, reducing taxable income for the contribution year. Funds grow tax-deferred, meaning taxes are owed only upon withdrawal. Distributions are taxed as ordinary income, and early withdrawals before age 59½ typically incur a 10% penalty unless an exception applies, such as for first-time home purchases or education expenses.

For 2024, the annual contribution limit is $7,000, with an additional $1,000 catch-up contribution for those 50 and older. Deductibility depends on income and workplace retirement plan coverage. For instance, in 2024, single filers earning over $87,000 and married couples filing jointly earning over $143,000 (if covered by a workplace plan) face reduced or eliminated deductions.

Roth IRA

Roth IRA contributions are made with after-tax dollars, meaning they don’t provide an immediate tax deduction. However, qualified withdrawals—including earnings—are entirely tax-free if the account has been open for at least five years and the account holder is at least 59½.

Contribution limits for 2024 match those of Traditional IRAs, but income restrictions apply. Single filers earning more than $161,000 cannot contribute directly but may use a backdoor Roth conversion strategy. Unlike Traditional IRAs, Roth IRAs have no required minimum distributions (RMDs), allowing assets to grow indefinitely.

SEP IRA

A Simplified Employee Pension (SEP) IRA is for self-employed individuals and small business owners. Contributions, made only by the employer, are tax-deductible as a business expense. In 2024, the maximum contribution is the lesser of 25% of an employee’s compensation or $69,000. Employees cannot contribute to their SEP IRA, and all eligible employees must receive the same percentage of compensation as the employer contributes for themselves.

SEP IRAs follow Traditional IRA withdrawal rules, with distributions taxed as ordinary income and early withdrawals potentially incurring penalties. The higher contribution limits make SEP IRAs attractive for business owners maximizing retirement savings.

SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is for small businesses with 100 or fewer employees. Both employers and employees contribute. Employees make salary deferral contributions, while employers must either match up to 3% of compensation or make a fixed 2% contribution for all eligible employees.

The 2024 employee contribution limit is $16,000, with a $3,500 catch-up contribution for those 50 and older. Withdrawals within the first two years of participation face a 25% penalty, discouraging early access. SIMPLE IRAs provide a lower-cost alternative to 401(k) plans, making them practical for small businesses.

Custodial Arrangements

IRAs must be held by a custodian, such as a bank, brokerage firm, or credit union, responsible for maintaining the account and ensuring IRS compliance. Custodians handle trades, contributions, distributions, and tax reporting, including issuing Form 5498 for contributions and Form 1099-R for withdrawals.

Investment options depend on the custodian. Traditional brokerage custodians offer stocks, bonds, mutual funds, and ETFs, while self-directed IRAs allow alternative investments like real estate, private equity, and precious metals. These require additional due diligence, as custodians do not verify asset legitimacy. Investors must comply with IRS rules, particularly regarding prohibited transactions with disqualified persons, such as the account holder and certain family members.

Custodians enforce contribution limits and monitor RMDs for applicable accounts. Failing to take an RMD results in a 25% penalty on the shortfall, though this can drop to 10% if corrected in a timely manner. Custodians provide RMD calculations based on IRS life expectancy tables, but account holders are responsible for withdrawing the correct amount.

Investment Flexibility

Investment options vary by financial institution. Traditional brokerage firms typically offer publicly traded assets like stocks, bonds, mutual funds, and ETFs. Some brokerages allow options trading in IRAs, but margin accounts and short-selling are generally prohibited due to IRS restrictions on borrowing within tax-advantaged accounts.

Self-directed IRAs expand choices to include real estate, private equity, tax liens, and cryptocurrency. These carry added complexity and regulatory scrutiny. For instance, real estate within an IRA must be strictly for investment purposes—personal use, such as staying in a property owned by the IRA, violates IRS rules and could disqualify the account. Alternative assets also pose liquidity challenges, as selling a property or private business interest is far less immediate than liquidating stocks or bonds.

Investment restrictions extend to collectibles, including art, antiques, and most precious metals, though IRS-approved bullion is an exception. Violating these rules results in the asset being treated as a distribution, triggering taxes and possible penalties.

Tax Characteristics

Tax treatment influences contributions and withdrawals. In a taxable brokerage account, capital gains are subject to short-term or long-term tax rates, with long-term gains taxed at 0%, 15%, or 20% based on income. Qualified dividends also receive favorable tax treatment. In contrast, gains and dividends within an IRA grow tax-deferred or tax-free, enhancing portfolio growth over time.

Losses within an IRA are not deductible since gains are not taxed annually. This prevents tax-loss harvesting within IRAs. The only instance where a loss may be recognized is if the entire IRA is closed and total distributions are less than the original after-tax contributions, which is rare and subject to IRS requirements.

Mandatory Distribution Requirements

Withdrawal rules vary by IRA type. Traditional, SEP, and SIMPLE IRAs require RMDs starting at age 73 in 2024. The amount is calculated using the IRS Uniform Lifetime Table, which factors in life expectancy and account balance. Failing to take the required amount results in a 25% penalty, though this can drop to 10% if corrected within two years. The first RMD can be delayed until April 1 of the year following the account holder’s 73rd birthday, but this requires taking two distributions in the same year, potentially increasing taxable income.

Roth IRAs do not have RMDs during the account holder’s lifetime, allowing assets to grow tax-free. This makes them useful for estate planning, as beneficiaries can inherit the account without the original owner being forced to deplete it. However, non-spouse beneficiaries must withdraw the full balance within 10 years of the original owner’s death unless an exception applies.

Distinguishing Features From a Standard Brokerage Account

While both IRAs and brokerage accounts provide access to investments, they differ in tax treatment, withdrawal rules, and regulations.

Brokerage accounts allow unrestricted access to funds, enabling investors to buy and sell securities at any time without penalties. In contrast, IRAs impose early withdrawal restrictions, with penalties applying in most cases before age 59½. Even when penalty-free exceptions exist, such as for education expenses or first-time home purchases, Traditional IRA distributions are still subject to ordinary income tax.

A key distinction is tax efficiency. Gains in a brokerage account are subject to capital gains taxes, while dividends may be taxed at ordinary income rates or the lower qualified dividend rate. IRAs shield investments from annual taxation, either deferring taxes until withdrawal or eliminating them entirely in the case of Roth accounts. However, the inability to deduct capital losses within an IRA removes a tax planning tool available in a standard brokerage account.