One of the first steps to investing is to set up an investment account. One of the first questions that will be asked is what kind of account do you want to open? This article will walk through the key differences between each type of account.
We will start with the most basic: a brokerage account.
Brokerage Account:
A brokerage account is the most basic investment account. It allows you to buy and sell securities like stocks, bonds, and mutual funds. A brokerage account also has no tax advantages.
The money earned from selling an investment for more than you bought it is considered income, and is taxed. The rate at which you are taxed is dependent on many factors such as your total income from the year across all income sources, the kind of investment, and the kind of earnings (interest, dividends, capital gains, etc.).
There are no rules for how much you can put into or take out of a brokerage account. As we will see later, the Roth IRA and Traditional IRA provide certain tax benefits, but with certain restrictions.
IRA = Individual Retirement Account
Roth IRA
A Roth IRA is a type of retirement account that allows you to withdraw the money that you have earned in investment income without paying taxes.
However, because this is a retirement account, you cannot withdraw the money until you reach a certain age without facing penalties. As of 2026 this age is 59.5 years.
Additionally, Roth IRA’s have an annual contribution limit. As of 2026, this limit is $7,500. If you’re 50 years or older, you can contribute an additional $1,100 for 2026 for a total of $8,600.
Roth IRA’s have one additional bonus: you are allowed to withdraw your contributions before the withdrawal age, but not your investment gains. So, if you put in $5,000 and it is now worth $15,000, you could only withdraw your original $5,000 before the withdrawal age without incurring penalties.
Traditional IRA
A traditional IRA is essentially the opposite of a Roth IRA, it allows you to contribute pre-tax income. You only pay income tax on the money when you withdraw it during retirement.
Traditional IRA’s also have penalties for early withdrawal. As of 2026 this withdrawal age is 59.5 years. Also, you will begin to incur penalties if you do not start withdrawing your money by age 73. This is called a Required Minimum Distribution (RMD)
Similar to a Roth IRA, Traditional IRA’s have an annual contribution limit. As of 2026, this limit is $7,500. If you’re 50 years or older, you can contribute an additional $1,100 for 2026 for a total of $8,600.