Is an IRA Considered a Mutual Fund?
Many individuals switching out of workplace retirement accounts like 401(k) plans opt to move their funds over to individual retirement accounts instead. This can be financially risky; even minimal differences in fees could erode thousands of dollars over time.
Investment options within an IRA should reflect both your goals and risk tolerance. A MassMutual financial professional can assist in exploring options available to you when selecting an IRA investment strategy.
Diversification
Diversification is an often-cited investing principle that helps reduce risk by spreading your investments across various asset classes. By spreading them out across various asset classes, diversification helps protect you against suffering a devastating loss if one investment class such as stocks or real estate takes a significant hit.
Diversify by purchasing shares in various companies or assets, which is why many investors turn to mutual funds for diversification. Mutual funds are open-end investment companies that collect money from investors in exchange for shares of the fund that invest in various portfolios of securities and short-term money-market instruments.
But not all mutual funds are created equal; your choice of investment vehicle also matters. For instance, investing in a taxable account such as a brokerage account or traditional retirement account could leave you subject to taxes when selling shares; when investing through a Self-Directed IRA your withdrawals during retirement are tax-free allowing true diversification within your retirement portfolio.
Tax-Free Withdrawals
IRAs offer an efficient, practical and tax-effective means of saving for retirement, with tax breaks helping compound investments. But you should also explore other retirement planning strategies, including Roth IRAs or 401(k). Depending on your goals and circumstances, one of these might be better than an IRA.
As traditional IRA contributions are tax-deferred, income taxes must be paid when withdrawing your money – plus an additional 10% penalty applies if you’re under 59.5.
Good news is that the IRS permits penalty-free withdrawals from IRAs for medical expenses and unreimbursed unemployment compensation benefits, without incurring a 10% penalty. You can also withdraw funds without being subject to this fee should you become totally and permanently disabled or the IRS levy your account to collect past taxes due.
Taxes on Withdrawals
Investing with a traditional IRA provides more investment options than workplace plans like 401(k)s or simplified employee pensions (SEP). Your contributions may be taxed before going in, while withdrawals won’t incur taxes except in cases of inheritance accounts.
ETFs offer operational differences that could play into your decision about which one to invest in.
If you want your earnings sooner, income funds may be the better choice than capital appreciation funds which typically offer long-term growth and can be riskier initially. When selecting your investments, pay special attention to account and investment minimums; some providers have no minimums while others require $1,000 or more – some mutual funds even charge loads when buying or selling, compromising returns even further whereas ETFs typically don’t charge loads but still require commission fees which must be factored into your cost analysis.
Fees
Fees associated with an IRA can differ depending on which provider you select. Some providers charge account setup or maintenance fees; others may have variable broker transaction fees or other costs that need to be covered.
The best IRAs feature low or no fees, giving you access to a range of investments such as individual stocks, mutual funds, ETFs and even real estate investments. Just keep in mind that real estate investments tend to experience short and long-term volatility that may impact their performance in your IRA account.
Target-date funds are another popular investment choice within an IRA, as they automatically adjust their allocation in accordance with your retirement date. Though these funds often have higher expense ratios than others, you may find lower cost alternatives by shopping around. Keep in mind that available investments for an IRA may differ depending on which custodian or trustee holds it.
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