Roth IRA vs taxable investment account
I'm new to investing, using M1 Finance, and have been doing some overall research.
From what I know, Roth IRA is tax-free income and mostly used as a retirement plan so if I invest in a Roth IRA account, all the dividends income are not taxed (correct me if I'm wrong). In contrast, with a regular taxable account I will have to pay tax on dividends earned as well as trading earned.
Questions are:
Wouldn't a Roth IRA be more beneficial since I won't get taxed on the
income?
Why would anyone prefer one over the other?
Is it a good idea to have a taxable account AND a Roth IRA account at
the same time?
Many thanks!
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The three key differences between a Roth IRA and taxable investment account are:
Tax on gains
Access to gains
Eligibility to contribute
With a Roth IRA, you don't pay any income or capital gains tax on the earnings in the account, but you can't touch the gains until you are at least 59 1/2 years old (if you do, you will pay taxes, in addition to a penalty). Contributions are also limited, and only allowed if you have earned income. If you have too much earned income, however, the limit will be lower (or even 0, meaning contributions not allowed at all).
With a taxable investment account, you can contribute any amount you'd like at any time and withdraw any amount at any time. Capital gains, interest, and dividends are subject to tax, but careful planning can reduce this tax burden.
It's a good idea to have both because while the tax-free nature of Roth gains is something you want to take advantage of, there is a limit to what you can put in there, and a (temporary - until retirement) limit to what you can take out, so if you plan to save/invest more than the limit and think you might ever want access to your investment gains while you're younger, you'll want a standard taxable account as well.
In addition to what yoozer8 wrote, you can't "put back" contributions (not gains, but contributions) that you withdrew.
For example, if you contribute 00 to a Roth every year, and need to withdraw 000 for some purpose or another, the money is gone (from your IRA; you still have the 000, but can't later1 reinvest it back in the Roth). Whereas if you invest 00 to a taxable account every year, and need to withdraw 000 for some purpose or another, you can invest another 000 whenever you please, in addition to the regular 00.
1 Ignoring the 60-day IRA pseudo-loan.
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