Feeling overwhelmed understanding Roth IRA vs Brokerage account retirement savings tax tradeoffs? You’ve done the hard work of earning a great income, and you’re committed to saving for a comfortable retirement. But the moment you look at your options—Roth, Traditional, Taxable, Capital Gains, MAGI—it feels like you need a degree in Tax Law just to put your money in the right place. The complexity can be overwhelming, and the fear of making a mistake that costs you thousands in retirement is real. You want a straightforward answer: Where should you put my savings right now to pay the least tax later?
For married couples, leveraging the power of dual contributions can dramatically amplify these results. We’re going to walk through how these two types of accounts stack up, especially for mass-affluent earners in Illinois who are serious about their financial future.
Roth IRA vs Brokerage account facts and challenges
- In a Roth IRA, all growth is tax-free, and qualified withdrawals are tax-free.
- Roth IRA contribution limits and income phaseouts can change eligibility. I wrote about 2025 limits in Roth 401(k) And Roth IRA Contribution Limits 2025 Maximize Retirement (IRS).
- Early Roth withdrawals can trigger ordinary income tax on earnings and a 10% penalty if under 59½ (exceptions apply). (IRS)
- In a brokerage account, you owe annual taxes on dividends, then capital gains taxes on the appreciation you actually realize when you sell. Even when you “reinvest” dividends, you still pay tax each year on those dividends, which drags performance.
- Brokerage accounts face ongoing dividend taxes and capital gains on sale. Under current Federal tax law short term gains are taxed at your marginal income tax rate. Long term gains are taxed
- Illinois taxes investment income at a flat rate but excludes retirement income (including IRA distributions).
- Future brackets and thresholds can move with inflation—always verify before acting.
Roth IRA vs Brokerage account illustrated
To keep things clean, I invest the same dollars in both accounts each year. For the brokerage account, I assume you pay the dividend taxes out-of-pocket so the portfolio can fully reinvest dividends, and I track those taxes separately.
To simplify, I keep the Single and Married Filing status under the Roth phaseout. I model a Single filer earning $149,000 MAGI and a Married Filing Jointly couple earning $235,000 MAGI, both in Illinois, contributing the statutory Roth IRA maximum each year and—strictly for apples-to-apples—putting the same dollar amount into a brokerage account. I inflate income 3% per year until age 70, assume 2025 rules, and show what happens if you start saving at 35, 45, or 55. I also show the cost of an early withdrawal after 10 years, and the taxes owed when taking 5% withdrawals at ages 70, 75, 80, 85, and 90. All numbers are illustrative, based on assumptions listed below.
Assumptions for the illustrations
- Roth IRA contributions: $7,000 under age 50; $8,000 age 50+ (per person).
- Investment return: 7% nominal per year
- Tax rates applied to brokerage account: 15% federal on qualified dividends and long-term capital gains, plus 4.95% Illinois.
- Illinois generally excludes IRA distributions from state income tax; investment income in a brokerage account is taxed by Illinois. (Illinois Department of Revenue)
Roth IRA vs Brokerage account retirement savings: Single filer at $149,000 MAGI
Roth IRA vs Brokerage Accumulation through age 70 (start at 35, 45, 55)
The Roth has an advantage in all scenarios. That advantage compounds as you might expect with no tax on the gains.
Early withdrawal Roth IRA vs Brokerage account after 10 years — Single Filer
Both accounts have the same value after 10 years when not considering taxes. Early withdrawals on the Roth tax the gains, not the original savings. There is a further 10% penalty on the earnings. The calculation for brokerage does not net out the prior taxes paid. That gives the advantage to the brokerage account, except at age 55. At that time period, you have crossed the IRS definition of retirement and have met the five year holding period requirement.
Separately, consider in the 35 and 45 year old scenarios, that if you only wanted to pull say $20,000, there would be no tax or penalty on the Roth money. You would be pulling from what you saved, which you already paid taxes on.
All this said, if you believe you are going to need the money prior to the Roth account five year holding period or age 59 1/2, you should use a brokerage account.
Roth IRA vs Brokerage account 5% withdrawals ages 70+ – Single Filer
(Taxes shown for the brokerage account; Roth withdrawals are tax-free when qualified.)
The Brokerage has expected taxes from long term capital gains. There may also be short term gains depending on how the money is invested. The Roth has an advantage in all scenarios. This can be particularly important assuming that the cost of living continues to rise.
Roth IRA vs Brokerage account retirement savings: Married Filing Jointly at $235,000 MAGI
Roth IRA vs Brokerage account accumulation through age 70 (start at 35, 45, 55)
As was the case with the Single filer, The Roth has an advantage in all scenarios. That advantage compounds as you might expect with no tax on the gains.
Early withdrawal Roth IRA vs Brokerage account after 10 years — Married Filing Jointly
Both accounts have the same value after 10 years when not considering taxes. Early withdrawals on the Roth tax the gains, not the original savings. There is a further 10% penalty on the earnings. The calculation for brokerage does not net out the prior taxes paid. That gives the advantage to the brokerage account, except at age 55. At that time period, you have crossed the IRS definition of retirement and have met the five year holding period requirement.
Separately, consider in the 35 and 45 year old scenarios, that if you only wanted to pull say $20,000 from each spouses account, there would be no tax or penalty on the Roth money. You would be pulling from what you saved, which you already paid taxes on.
All this said, if you believe you are going to need the money prior to the Roth account five year holding period or age 59 1/2, you should use a brokerage account.
Roth IRA vs Brokerage account 5% withdrawals ages 70+
The results mirror those of the Single filer. The Brokerage account has expected taxes from long term capital gains. There may also be short term gains depending on how the money is invested. The Roth has an advantage in all scenarios. This can be particularly important assuming that the cost of living continues to rise.
Concluding Roth IRA vs Brokerage account thoughts
In every scenario, the Roth balance beats the brokerage account on an after-tax basis by exactly the capital-gains tax you’d owe if you liquidated the brokerage account at age 70. In my home state Illinois it does tax dividends and realized gains in brokerage accounts, but generally does not tax IRA distributions. That widens the Roth edge for Illinois residents.
If your income is above the higher phaseout of the income limit for contributing to the IRA, all may not be lost. If you have access to a 401(k)/403(b)/457 plan with a Roth option, you can contribute to its statutory max. Roth 401(k) And Roth IRA Contribution Limits 2025 Maximize Retirement. Depending on your cash flow, if you are below the limits and have an employer sponsored plan, you can save the max in both!
In the battle of Roth IRA vs Brokerage account, the Roth is the clear winner.
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