While an individual retirement account can hold brokerage account funds as an asset, at times it may make sense to have a brokerage account that's completely separate from your IRA. Your investments in an IRA may be limited by income or other considerations, or you may need the flexibility to withdraw the money at any time you like. Even so, the tax benefits of an IRA make a strong argument for contributing to one of these retirement accounts.
An IRA account, whether Roth or traditional, offers certain tax benefits. With a traditional account, you may be able to claim a tax deduction for money you invest today and allow the money to grow tax-deferred until you retire. When you withdraw the money, you will pay taxes on the withdrawal at regular income tax rates. With a Roth, you receive no deduction for contributions, but Roth funds withdrawn at age 59 1/2 -- as long as the account has been open for five years -- are not taxed. With a non-IRA brokerage account, your capital gains from trading securities will be taxed the year that you make the trade. You will also pay taxes on the dividends that your stocks earn in the year that you earn them.
An IRA account must be managed by a trustee or custodian, who ensures the tax-advantaged status of the account is preserved by verifying that all investments are allowed by the Internal Revenue Service and all trades are made according to IRS rules and regulations. An IRA trustee can be a bank, insurance company, mutual fund company, independent trustee or brokerage firm. With a non-IRA brokerage account, you manage the account, with the help of a stockbroker or any other financial advisers you may choose. Since the brokerage account by itself is not tax-advantaged, it does not require the services of a trustee.
While IRA trustee fees paid outside of the IRA account with personal funds are deductible from your income taxes, investment management fees charged directly to your IRA account are not tax deductible. Expenses related to trading stocks in a non-IRA brokerage account are deductible from your taxable income. These expenses include commissions and flat fees for trades.
The most that you can contribute each year to a traditional IRA account as of April 2013 is $5,500 if you are younger than 50 or $6,500 if you are 50 or older. Your deduction for these contributions may be less than this amount based on the law, your income level, coverage by a workplace retirement plan and the types of income that you have. You can contribute to a brokerage account held outside of an IRA and only be limited by your own personal resources.
The IRS intends for you to use IRA funds for retirement, and the tax laws are structured to encourage you to do so. If you withdraw money for a purpose not specifically allowed before age 59 1/2, you will pay a 10 percent tax penalty on the amount that you withdraw. You can always withdraw money from a non-IRA brokerage account without a tax penalty.
You can chose to open an IRA as a brokerage account, combining many of the benefits of a brokerage account with an IRA. You can use the account to pick your own stocks and actively trade inside the account. By doing this, you can maintain the tax-deferred status of an IRA, while also ensuring your own independence with regard to investment choices, and you can trade at will. The broker will act as the trustee and ensure that your account stays compliant with IRS regulations.