Is an IRA Considered a Mutual Fund?
Mutual funds and IRAs provide two different investment vehicles. Comparing an IRA with one is like comparing apples and oranges.
As investors transition out of workplace plans, their savings often end up in Individual Retirement Accounts (IRAs). Unfortunately, marketing from financial firms often leads them in this direction and many don’t fully comprehend fee disclosures – this could end up costing them thousands over time from seemingly minor differences in fees.
Taxes
An attractive benefit of Individual Retirement Accounts (IRAs) is that investments sold within them do not incur capital gains tax. Investors can choose from an extensive array of investments including mutual funds, exchange-traded funds, stocks and bonds. A financial professional can assist a client in selecting investments best suited for his/her unique needs and investment goals.
An individual may opt to invest in a target-date fund that aligns itself with their anticipated retirement date, such as 401(k). These investments can also be found within an IRA account.
Traditional and Roth IRA annual contribution limits vary based on an individual’s annual income, with withdrawals taxed as ordinary income; if withdrawing before age 59 1/2 a 10% early withdrawal penalty may apply; to avoid this fee a Roth IRA might be chosen; while self-employed people can set up Simplified Employee Pension (SEP) IRAs to avoid taxes altogether.
Withdrawals
After making your initial cash contribution to an IRA, a brokerage firm typically invests it immediately. You have access to an expansive universe of investable options; however, diversified and low-cost mutual funds or ETFs should be prioritised as they do not trigger capital gains taxes upon sale within an IRA account.
If you are still decades from retirement and want market-level growth over the long haul, index fund investments may be suitable for you. They seek to replicate the performance of broad stock market indices while not paying compensation to financial professionals like 401(k) plans do; this allows for reduced expenses ratios.
If your children are college age, IRA funds can be withdrawn without incurring the 10% early withdrawal penalty (prior to age 59 1/2). Use it for qualified education expenses like tuition fees, room and board costs and required course materials without incurring penalties; alternatively you can withdraw up to $10,000 of this sum without penalty for purchasing their first home.
Investments
IRAs are tax-advantaged accounts that allow investors to save for retirement with tax benefits. There are various kinds of IRAs available, including traditional, Roth, Simplified Employee Pension Plan (SEP) IRAs and Savings Incentive Match Plans for Employers (SIMPLE IRAs). Custodianship for these IRAs can be held by banks, investment companies or any entity approved to act as custodian.
Most IRA investments consist of mutual funds that offer broad diversification. Individual investors who would rather manage their own IRA may choose individual stocks instead, although this increases risk.
Bonds, or fixed-income investments, can help lower the overall risk of an investment portfolio. IRA investors can select both taxable bonds (such as those issued by the U.S. Treasury) and tax-free bonds to diversify their investment strategy. Target-date retirement funds – mutual funds that work towards an investor’s expected retirement date and typically come with low expenses ratios – may also be appropriate investments in IRAs.
Fees
IRA investors can select any investment vehicle of their choosing for their IRA contributions – be it stocks, bonds, mutual funds or certificates of deposit. When an account is opened with an IRA provider, any cash contributions initially reside in an account known as a money market fund until an investor chooses how best to invest them; with mutual funds however, your money is immediately invested into one or more portfolios (known as share classes), and performance of those portfolios less fund fees will determine your investment return.
Financial professionals can assist in creating an IRA investment plan tailored to your overall financial circumstances and goals. They’ll ask questions to understand your goals and analyze your entire financial picture, taking into account both risk tolerance and high-cost fees such as wrap fees that could eventually erode away at your account balance over time1.1
Categorised in: Blog