IRA vs. Brokerage Account: Where Should Your Extra Money Go This Year?

Here's how to make that call.

A lot of people are struggling to pay the bills this year due to rampant inflation. As such, the idea of having extra money to invest is unfortunately, for many, a laughable notion.

But what if you're not in that situation? It may be that your salary at work is generous and you do a great job of living below your means so that you do have extra money on hand to invest.

At that point, you have a choice: You could aim to max out your IRA, or you could invest your money in a regular brokerage account. But what's the right call?

Why your IRA should win out -- to a point

There's a reason it pays to do what you can to max out your IRA every year. Unlike regular brokerage accounts, IRAs come with built-in tax benefits. If you fund a traditional IRA, you won't be taxed on the money that goes into your account. And that could lower your IRS burden substantially.

This year, IRA contributions max out at $6,000 for workers under age 50. Those 50 and over get a $1,000 catch-up option that raises their annual limit to $7,000. And to be clear, you don't have to be "behind" on retirement savings to make IRA catch-up contributions. If you're 50 or older, you can put up to $7,000 into your account this year whether you have $600 saved for retirement or $2 million.

But while it definitely pays to try to max out your IRA for the tax savings involved, that doesn't mean an IRA should be the only account you invest in. The reason? Because IRAs offer a lot of tax savings, they also come with strict rules. And one rule is that you generally can't take a withdrawal from an IRA before age 59 ½. If you do, you'll face a 10% penalty.

Brokerage accounts don't offer tax benefits, but they're less rigid. If you decide to cash out some stocks in your brokerage account at age 35 and use the money to buy a house, that's your call, and there's no penalty involved (though you may have to pay capital gains taxes).

Similarly, say you end up in a position where you're able to retire in your early 50s. If all of your money is tied up in your IRA, you'll be out of luck for several years, whereas you can tap a brokerage account at that age without worry.

Make the most of your investment accounts

It generally pays to max out an IRA and then put any extra money you have into a brokerage account. But what if you don't have that much money to work with? What if the most you can manage to set aside for investment purposes this year is $2,000? Should all of your money go into your IRA?

That's a tougher call. It could work to your benefit to put all of that cash into your IRA to maximize your tax savings. But if you want more flexibility down the line, putting, say, $1,500 of that into an IRA and $500 into a brokerage account isn't unreasonable.

Ultimately, saving and investing money buys you more options and financial freedom in the future. So you should feel free to do so in a way that sits well with you and makes you feel comfortable. In some cases, that could mean forgoing a tax break, or partial tax break, to get more flexibility.