IRA vs Brokerage Account

The other day as I was flipping through my Twitter feed I came across a tweet from @alphatrends (great guy to follow for trade ideas and general knowledge) that made me stop and think about how I had structured my investments in my portfolios. I have two accounts (three if you count my crypto account), one is my IRA, where I am of course, saving for my retirement. The other is a regular brokerage account where I can pull money out if I needed, but still trade and grow the account more then say, a savings account. 

The way I have been trading/investing to date is mostly swing trades/day trades. However, I do have a couple of long term holds (Dividend ETFs) that I plan to just add and let grow in my IRA. My brokerage account is smaller than my IRA at the moment, and I only swing trade in that account. 

This made sense to me. I hold my long term investments in my IRA, since I am not touching that for 25-30 years, and my short term investments in my brokerage account since I hope to have easy access and pull money from it when needed. Makes sense, right? At least to me it did.

 

Tweet from @alphatrends

@alphatrends on Twitter

The tweet I read flipped that whole idea upside down. One of the main benefits of having an IRA is that your taxes are deferred until you withdraw (hopefully not until you’re retired). Which means that you don’t have to worry as much about holding investments over a year to avoid capital gains taxes. That would lend itself to be used better as a swing trading account. 

My brokerage account on the other hand is not a tax deferred account. I will be taxed on every transaction I profit from at either the capital gains rate or the long term investment rate. Since the long term investment rate is lower, it would make more sense to have my brokerage account setup to hold mostly long term holdings. 

Mind blown…I have been doing this wrong. But I also can’t believe I didn’t think of it sooner. So thank you to @AlphaTrends for bringing up this good point. 

So as of this month I am starting to reallocate some of my investments. I will shift my brokerage account to more low cost ETFs, Bonds, and maybe a couple of individual stocks I want to hold longer term. In my IRA I will start to focus more on swing trades, while maintaining some longer holds as well.

Taxes are often the most overlooked aspect of investing and trading for newbies. It’s something that I have been learning more about in the past year. My investment journey is still relatively young, so making changes now will have a huge impact 20-30 years down the road. 

Hope this helps some of you think about how you have allocated your own investments. Remember, do your own research. Good luck!