Q: I'm 25 and ready to buy my first stocks. Should I open an IRA or a regular brokerage account?
It depends on what you're investing for and when you might need the money.
An IRA -- either traditional or Roth -- is hands-down the best option from a cost standpoint. Not only will you not have to worry about dividend or capital gains taxes each year in these tax-advantaged retirement accounts, but you can also get a nice tax break for your contributions. With a traditional IRA, you can potentially deduct every penny you contribute, and a Roth IRA can give you tax-free income when you withdraw from the account.
The caveat is that an IRA requires you to commit your money for a long period of time. There are a couple major exceptions, but you typically can't tap into your IRA until you're 59 1/2.
If you're investing for a shorter-term goal, or you're just investing to get a feel for the market, a regular brokerage account could be best. You'll have to pay taxes on your dividend income, as well as taxes on any capital gains you earn each year, but it could still be the best choice if you need the flexibility to withdraw.
One final thought is that a Roth IRA could be a good compromise. While a Roth IRA has the same standard withdrawal age as other retirement accounts, this only applies to the earnings in a Roth IRA. You're free to withdraw your original contributions at any time and for any reason, without paying a penalty.
