Published in: Buying Stocks | Dec. 19, 2018

Is a Roth IRA Considered a Brokerage Account?

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Yes, and, as a matter of fact, you’ll often find brokerage accounts that cater to people opening a traditional or Roth IRA.

A piggy bank with the words ROTH IRA written on the side.

Image source: Getty Images

It's essential to have a brokerage account if you want to invest in individual stocks, exchange traded funds, and other popular investments. A relationship with a broker can open up a wide array of investment choices, going well beyond what other institutions like mutual fund companies can offer.

But there are many different types of brokerage accounts. All brokers allow customers to open basic accounts, but most will also let their clients keep their retirement savings in a brokerage account. In particular, IRAs are a popular way for retirement savers to get valuable tax benefits for their investments, and you'll often find brokerage accounts that cater to those seeking to open either traditional or Roth IRAs.

What's a Roth IRA, and why should I have one?

Roth IRAs are retirement accounts that give investors valuable tax benefits. As long as you meet the requirements of the Roth IRA, any income or gains on the investments you make within the Roth are tax-free when you withdraw money in retirement. That's much different from what traditional IRAs offer, because even though your money in a traditional IRA grows on a tax-deferred basis, you still have to pay tax on withdrawals when you take the money out after you retire.

Yet many people choose not to open Roth IRAs. The reason is that Roths don't offer the same upfront tax benefits as traditional IRAs, as you're not allowed to deduct a Roth IRA contribution from your taxable income for the year in which you contribute money to the retirement account. In general, using a Roth is a better choice when you're in a low tax bracket, while choosing a traditional IRA is more lucrative when you're in a high bracket and can therefore see a lot of tax savings from the deduction for contributions.

Different types of Roth IRAs

You don't have to have a brokerage account to open a Roth IRA. Banks and mutual fund companies routinely offer Roth IRAs to their customers, and you can hold bank CDs or funds in a Roth IRA just as easily as stocks or bonds.

However, the benefit of having a Roth IRA brokerage account is that you can invest in a much wider variety of different investments. Because any gains are tax-free, your goal with a Roth IRA should be to grow your account balance as much as possible. By letting you invest directly in the stock market, many investors find that easiest to do in a brokerage account.

Special aspects of Roth IRA brokerage accounts

There are a few special things to keep in mind when you decide to open a Roth IRA brokerage account. The first is that in order for a broker to offer a Roth IRA, the institution must be willing to act as the custodian of your Roth IRA assets. Most brokers won't hesitate to take on this role, but sometimes, you'll need to pay an annual custodial fee as part of your agreement. A modest fee isn't necessarily unfair, because there are some extra reporting requirements for Roth IRAs that aren't required for a regular brokerage account. However, you should question any IRA custodial fee that's more than a minimal amount of around $10 or $20 per year.

In addition, Roth IRA brokerage accounts have to be set up as cash accounts rather than margin accounts. The reason: IRS regulations don't allow you to invest borrowed money in a Roth IRA, so a margin account would potentially violate the Roth IRA rules and threaten the tax benefits that you get from it. As a result, certain investing strategies that rely on having margin capacity available don't work in Roth IRAs. Examples include short-selling stocks or opening certain types of positions in options contracts.

Finally, Roth IRAs require you to name a beneficiary who'll be entitled to receive your retirement account assets after your death. If you properly name a beneficiary, then that person will potentially be able to continue to benefit from the tax-free nature of the Roth IRA. If you don't name a beneficiary, then the account balance will be payable to your estate, and that threatens the ability of your heirs to take advantage of tax-free treatment that can potentially extend for years beyond your death.

What to look for in a Roth IRA brokerage account

Most of the best qualities for a Roth IRA brokerage account are similar to what you'd want in any account with a broker. Low commission costs for trading stocks are essential, and you'll also want to avoid brokers that nickel and dime you with a lot of extra fees or charges. Minimum account balances should match up with the amount of savings you have to invest, and you should get access to the research tools and other account features that you need in order to make smart investment decisions.

One thing to consider is having your Roth IRA brokerage account at the same institution that handles your other brokerage relationships. Because the Roth IRA is a different kind of account from a regular brokerage account, you can get separate insurance protection from the Securities Insurance Protection Corporation. That could protect assets up to $500,000 in a Roth IRA and another $500,000 for a regular brokerage account in the event that your broker fails or becomes insolvent. In addition, if you have your Roth IRA brokerage account with the same broker as your other account, then handling contributions can be as simple as doing an account-to-account transfer of cash into your Roth IRA.

Make the most of a Roth IRA

The most successful Roth IRA investors find ways to make the size of their account grow explosively over the course of their careers, so that they can make tax-free withdrawals in retirement and have enough money to be financially secure for the rest of their lives. For most investors, the best chance to generate the kind of life-changing wealth that can support a healthy retirement lifestyle is to invest in the stock market.

Roth IRAs can indeed be brokerage accounts, and a Roth IRA brokerage account is a crucial tool in pursuing the goal of financial security and independence. Although competitors will try to offer alternatives that have some attractive features of their own, in the end, your best chance of success lies in identifying cutting-edge companies that are most likely to become leaders in their respective industries, and then putting your money to work by buying shares of those companies. The tax-free treatment of a Roth IRA can help your returns dramatically outperform what you'd be able to earn in just about any other type of brokerage account.

Using the wrong broker could cost you serious money

Over the long term, there's been no better way to grow your wealth than investing in the stock market. But using the wrong broker could make a big dent in your investing returns. Our experts have ranked and reviewed the top online stock brokers - simply click here to see the results and learn how to take advantage of the free trades and cash bonuses that our top-rated brokers are offering.