3 Reasons to Fund Your IRA Before Your Regular Brokerage Account

It's good to set priorities.

The money you need for near-term financial goals and emergencies should be kept in your savings account. But if you have extra money, you should invest it so it has the potential to grow into a much larger sum.

In that regard, you have choices. You could put your money into a regular brokerage account. Or, you could fund an IRA.

Brokerage accounts are the far more flexible option of the two. With a brokerage account, you're not restricted on when you can take withdrawals, whereas with an IRA, you could face steep penalties for removing funds prior to age 59 ½. But in spite of that, it generally pays to prioritize an IRA over a brokerage account. Here's why.

1. IRAs give you a tax break

When you fund a traditional IRA, your contributions go in on a tax-free basis. What this means is that every dollar you put into an IRA (up to the maximum allowable contribution limit) is a dollar the IRS won't tax you on.

Plus, with a traditional IRA, investment gains in your account aren't taxed year after year. Rather, those taxes are deferred until you start taking withdrawals. On the other hand, if you sell an investment at a profit in a brokerage account, you'll be liable for a tax bill for the year you incur that gain.

2. You may be less likely to cash out investments

When a need for money arises, it can be tempting to cash out investments and access the cash you need. But with an IRA, you may be less likely to tap your account, since there are penalties involved. And that could prevent you from faltering on the way to meeting your financial goals.

Let's imagine you really want to take a vacation and don't have the funds on hand. If you have $20,000 worth of stocks in a brokerage account, you may be tempted to cash out $3,000 worth and take that trip, even though your brokerage account is supposed to be earmarked for a longer-term goal. If you have that money in an IRA, the idea of getting penalized for an early withdrawal may be enough to stop you from going that route.

3. You'll have less stress later in life

Because brokerage accounts are easy enough to withdraw from, if you stick to one, you may find that you have less money set aside for retirement later in life. On the other hand, if you put your IRA first, you might retire with a solid enough nest egg to cover your bills with ease and avoid financial stress at a time when you're no longer earning money from a job.

Investing your money is a smart move no matter what. But putting IRA contributions ahead of brokerage account contributions could end up working to your benefit -- both in the near term as well as in the long run. Of course, once you've maxed out your IRA, it definitely pays to pump your remaining cash into a brokerage account. But hitting that annual IRA limit first is a smart bet.