The Moment
You have money to invest and are deciding between a Roth IRA and a taxable brokerage account. They hold the same investments (index funds, ETFs) — the difference is the tax wrapper around them.
This choice has a clear answer: max the Roth IRA first. The tax-free growth is extraordinarily valuable over long time horizons.
The Tax Comparison
$7,000/year invested for 30 years at 7%:
In a Roth IRA: Final balance: ~$661,000. You take out $661,000 — tax-free. Every dollar is yours.
In a taxable brokerage: Final balance: ~$661,000 before taxes. But you owe capital gains tax on the growth (~$451,000 in gains × 15-20% = $67,000-$90,000 in taxes). You keep $571,000-$594,000.
The Roth advantage: $67,000-$90,000 more — just from the tax wrapper. Same investments, same returns, different accounts.
The order of operations: 1. 401(k) to capture employer match (free money) 2. Roth IRA to $7,000/year (tax-free growth) 3. 401(k) to maximum $23,500 (tax-deferred growth) 4. Taxable brokerage for everything above that (tax-efficient growth)
When to use a taxable account first: - You need the money within 5 years (Roth earnings have withdrawal restrictions before 59.5) - You have already maxed all tax-advantaged accounts - You want to do tax-loss harvesting (not possible in retirement accounts) - You need money for a short-term goal (down payment, car, wedding)
Run Your Numbers
See the tax-free growth difference over time.
Compound Growth Projector
What to explore next
- →How do I open a Roth IRA?
- →What should I invest in inside my Roth IRA?
- →Should I do a backdoor Roth if my income is too high?
Frequently Asked Questions
Can I withdraw Roth IRA contributions early?
Yes — contributions (not earnings) can be withdrawn at any time, tax-free and penalty-free. This makes the Roth IRA flexible: it is a retirement account first, but it can serve as a backup emergency fund. Only earnings must stay until 59.5 (or face taxes + 10% penalty).
What about tax-loss harvesting in a taxable account?
Tax-loss harvesting (selling losers to offset gains) is only possible in taxable accounts. For portfolios over $50,000 in taxable accounts, the benefit can add 0.5-1.5% in after-tax returns. But this advantage does not outweigh the permanent tax-free growth of a Roth IRA — max the Roth first, then harvest losses in the taxable account.