Can someone explain a Brokerage Account?

Investing
#1

Hey guys. So my new job has bad options for 401k. High fees and whatnot. I don’t really care about the match because I have to be with the company for 4 years to be vested and I don’t think I’ll stay in my state that long. I have a Roth IRA with Vanguard and opened a Traditional IRA as well. Is a Brokerage account and Traditional IRA the same thing? When I try to contribute to it, I counts down from 6000 like my Roth IRA. I though traditional has unlimited contributions?

#2

Hi, a traditional IRA is like a Roth IRA in that it does have a $6000 yearly maximum (just check because each year it may change a little bit). A traditional IRA goes in pretax which means your paycheck looks smaller but the good thing is your income is lower so you’ll be taxed less that year. But when you withdraw that amount you’ll be taxed on the gains (hopefully you’ll be in a lower tax bracket in the future when you withdraw). So for a traditional IRA, money grows tax-deferred until withdrawal.

A brokerage account has unlimited contributions. Work > money is taxed as seen on your paycheck > contribute money to brokerage > withdraw > money is taxed based on your income. The good thing is you can withdraw money anytime. You don’t have to wait until retirement or until a certain age to withdraw. The bad news is your money is taxed twice but c’est la vie!

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#3

Thank you for the clarification. I don’t see a regular brokerage account on Vanguard. Am I not understanding something. Also I’m rolling over a old employers 401k into an IRA so id put it into the traditional correct!

#4

Read this by Jeremy: https://www.personalfinanceclub.com/the-layers-of-investing-why-ira-vs-index-funds-doesnt-make-sense/

A few notes:

  • You can have both a Roth IRA and a traditional IRA, but your maximum total contributions allowed per year is $6k. You can split it however you’d like, but I prefer to stick to one type of account fire simplicity.
  • Vanguard definitely has non-retirement accounts (what most people mean when they talk about brokerage accounts when they’re not talking about 401k, Roth/traditional IRA, etc.). They have you answer some simple questions after you click “Open An Account” to determine which type of account you’re opening, e.g., retirement (Roth/traditional IRA), non-retirement (good ol’ brokerage account), education (529), etc.
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