Traditional individual retirement accounts and brokerage accounts are taxed under two different systems: IRA accounts fall under income tax rules, while investments in brokerage accounts held outside of IRA accounts generally fall under capital gains tax rules. However, Roth IRAs are funded with after-tax money and grow without any income tax liability whatsoever, provided you hold the money in the Roth for at least five years. You can, of course, open a Roth IRA within a brokerage account, in which case all assets in the brokerage account are taxed under Roth IRA rules and capital gains tax rules are irrelevant.
The most obvious tax benefit of holding assets in a taxable account in a brokerage firm, outside of a retirement account, compared to a Roth IRA, is the absence of a 10 percent penalty on early withdrawals. Roth IRAs penalize you 10 percent on any earnings withdrawn from the plan before you reach the age of 59 1/2, though certain hardship provisions apply.
Tax Loss Harvesting
Non-taxable brokerage accounts allow you to engage in a tax planning technique called "tax-loss harvesting." If you have capital gains anywhere in your investment portfolio, you can sell other assets that happen to have lost money to cancel out your gains, thereby reducing or eliminating your capital gains tax liability. You can write any additional losses against up to $3,000 of ordinary income, and you can carry losses forward to deduct up to $3,000 in income each year in future years until you've used up all your capital losses. This can help you manage your capital gains tax.
You cannot borrow money from your own Roth IRA account. But you can borrow money by taking out a margin loan against a brokerage account. Loan proceeds are tax-free, and in certain circumstances, the interest on a margin loan can be deductible.
Investment expenses in a brokerage account, such as fees for financial advice and commissions, are generally tax deductible. You cannot deduct fees and commissions you incur within a Roth IRA account.
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