I need money; should I pull it from a brokerage account or an IRA?

It’s an age-old conversation that many financial strategists specializing in retirement planning have with their retiree clients. According to Bert Hofhuis, founder of BankingTimes, it all comes down to striking a balance between taxes and long-term growth strategies.

When you’re deciding whether to pull money from a brokerage account or an IRA, Hofhuis said, “IRA withdrawals are taxed as regular income, and a withdrawal could push you into a higher tax bracket. With a brokerage account, you’ll pay capital gains taxes, which are often lower than ordinary income tax rates, especially for investments held for longer than a year. If you’re trying to minimize taxes, the brokerage account could be a better short-term option.”

Brokerage accounts and IRAs serve a purpose: accumulating savings and increasing wealth. But their distinct features—particularly regarding taxation and withdrawal rules—dictate when it’s most advantageous to withdraw from each. Understanding the differences will help you optimize your retirement income and minimize your tax burden.

Brokerage accounts: Flexibility with taxable gains

A brokerage account is a taxable investment account with plenty of flexibility. You can deposit and withdraw money at any time without any age restrictions or penalties. Unlike IRAs, brokerage accounts don’t:

Limit annual contributions
Levy income restrictions for opening one
Set rules dictating when you can withdraw funds

This flexibility has a trade-off: taxation. When you sell investments within a brokerage account for profit, those gains are subject to capital gains taxes. The tax rate depends on how long you held the investment.

Short-term capital gains refer to investments held for one year or less. The profits are taxed at your ordinary income tax rate, which can be as high as 37% (as of current tax laws). Long-term capital gains refer to investments held longer than a year. Profits are taxed at preferential rates, typically 0%, 15% or 20%, depending on your income level. You’ll also pay tax on dividends or interest payments received from investments in a brokerage account the year you received them.

When to consider withdrawing from a brokerage account

Before retirement, for short-term goals: If you need funds for a down payment on a house, a child’s education or other significant expenses that pop up before retirement age, this account is a good source. You avoid the penalties associated with early IRA withdrawals.
As an emergency fund or bridge income: Having easily accessible, taxable funds can serve as an emergency reserve or provide income during unexpected unemployment periods without you having to touch your retirement accounts.
During a low-income year in retirement (for tax optimization): In retirement, if you have a year with a lower taxable income, drawing from a brokerage account and realizing long-term capital gains could work in your favor tax-wise. Should your income fall into certain brackets, your long-term capital gains tax could be 0%. This strategy is useful for managing your overall tax liability before required minimum distributions (RMDs) from traditional IRAs begin.
To avoid pushing into higher tax brackets: If drawing from a traditional IRA or 401(k) would push you into a higher income tax bracket, using funds from a brokerage account (especially long-term capital gains) can sometimes offer a more tax-friendly alternative.

IRAs: Tax advantages with withdrawal rules

Individual retirement accounts are specifically designed for retirement savings and offer significant tax savings. But these advantages come with strict rules governing contributions and withdrawals, particularly related to age. There are two primary types of IRAs: Traditional IRAs and Roth IRAs.

Traditional IRAs

With these IRAs, your contributions may be tax-deductible in the year they’re made, reducing your current taxable income. Your investments grow tax-free until withdrawal, at which point they’re taxed as ordinary income. You must begin taking RMDs, typically at age 73 (if born in 1960 or later), regardless of whether you need the money. Withdrawals before age 59 ½ are generally subject to a 10% penalty, in addition to being taxed as ordinary income unless an exception applies (first-time home purchase, qualified education expenses, unreimbursed medical expenses).

Roth IRAs

Because you contribute to a Roth IRA with after-tax dollars, qualified withdrawals in retirement are entirely tax-free—the Roth IRA’s biggest advantage. You’re not required to take RMDs during your lifetime, giving you greater control over your funds. While you can withdraw funds tax-free at any time, you can only withdraw earnings tax- and penalty-free after age 59 ½ and after the account has been open for at least five years. Penalties apply to early withdrawals of earnings if you don’t meet these conditions.

When to withdraw from an IRA

In retirement, for regular income: IRAs are specifically designed to provide income during your retirement years.
Traditional IRA first: If you expect to be in a lower tax bracket in retirement, taking the tax deduction now (via a traditional IRA) and paying taxes later when your income is lower can be a savvy financial strategy.
Roth IRA later: If you expect your tax bracket to remain the same or higher in retirement (or want tax-free income in your later years), draw from your Roth IRA. Since these withdrawals are tax-free, they won’t impact your adjusted gross income (AGI), which can help you avoid higher Medicare premiums or taxation of your Social Security benefits.
Strategically managing your RMDs: Once RMDs begin from traditional IRAs, you must withdraw a certain amount annually. You can use these distributions for living expenses. If, however, your cost of living is lower than your RMD, you might consider taking more from a traditional IRA (or brokerage account) and potentially converting some traditional IRA funds to a Roth IRA in years where it makes tax sense, to reduce future RMDs.
Emergency use (Roth IRA contributions): In a true emergency, you can withdraw your Roth IRA contributions at any time, tax and penalty-free, since you already paid taxes on those contributions.

A holistic approach

Ultimately, deciding when to withdraw from a brokerage account versus an IRA is less about choosing one over the other and more about integrating both into a comprehensive financial strategy. Your best bet? Consulting with a financial advisor who can help analyze your specific situation, project future tax implications and develop a personalized withdrawal strategy that optimizes your retirement income and minimizes your tax liabilities.

I need money; should I pull it from a brokerage account or an IRA?

Brokerage accounts: Flexibility with taxable gains

When to consider withdrawing from a brokerage account