When it comes to retirement investing, it’s not always what stocks you invest in that matter, but what accounts you use. 

Fortunately, today’s investors have many options for retirement savings account. Enjoying the security of self-directed IRAs, the safety net of pension plans/social security payments, and the growth potential of 401(k)s.

Two popular retirement options include a Roth IRA and mutual fund investments, both of which produce a lower tax burden than a traditional 401(k) or pension plan.

Plus, they allow you to invest in a wide range of assets like stocks, bonds, and mutual funds while enjoying the power of compounding, where earnings from your investments reinvest and produce incremental gains over time. 

In contrast, pension plans and social security payments do not have the same compounding effect. 

In this article, we’ll explore the benefits of Roth IRA vs. mutual fund investing, how they differ, and how to pad your IRA account with mutual funds for a comfortable retirement.

Understanding Roth IRA vs. Mutual Fund Investing

A Roth IRA is an individual retirement account/retirement savings account that allows you to make an annual contribution up to $6,500 ($7,500 for investors 50 years or older) of post-tax dollars annually with the promise of tax-free withdrawals later in life.

The funds held in a Roth IRA can be used to invest in several assets, including stocks, bonds, and mutual funds. 

Depending on your investment goals, you also can choose a self-directed IRA, which allows you to invest in other less common assets, like real estate, cryptocurrency, or precious metals. Find a custodian who offers self-directed IRA real estate accounts or investments in your desired assets. 

Here are the pros and cons of Roth IRAs:

Roth IRA Pros

  • Allows for investment diversity
  • Tax-free withdrawals 
  • Available as a self-directed investment option

Roth IRA Cons

  • Limited annual contributions
  • Penalties for withdrawing before 59 ½ years old

On the contrary, a mutual fund is not a single investment account but a portfolio that includes a variety of stocks, bonds, and other assets. 

Instead of investing in a single asset, like a stock or bond, a mutual fund allows you to pool your money with other individuals or organizations to invest in multiple securities simultaneously. Whereas Roth IRAs are designed for retirement savings, mutual funds are not exclusive to retirement. 

Also, mutual fund returns depend on portfolio performance and are typically earned through dividends and interest or by capital gains if the mutual fund sells off assets for a profit. 

As a result, mutual funds are a popular compound interest investment for passive investors who may prefer to track a specific index or the overall market instead of selecting individual stocks.

If you invest in a mutual fund, the management firm determines which assets are bought, held, and sold within the fund, aligning with its investment objectives and overall market conditions. This governs how and where your money is invested, and you will need to pay operational or management fees.

Therefore, thoroughly research your options before investing in a mutual fund, noting critical factors like management fees, equity ratios, portfolio composition, and ratings.

Here are the pros and cons of mutual funds:

Mutual Fund Pros

  • Portfolio management (less hands-on)
  • Less risk than other investment options
  • Generally low minimum investment threshold

Mutual Fund Cons

  • Potentially high management fees
  • This may be subject to slow execution/trade times

When you invest in tax liens, earnings come from the interest applied to the lien

Roth IRA Eligibility Limits

Roth IRA qualifications involve specific criteria, including income thresholds and contribution limits that must be met.

Roth IRA eligibility is primarily tied to your modified adjusted gross income. If you are a single filer earning less than $125,000 or a married couple filing jointly with a combined income of $198,000 or below, you can make the maximum contribution for the tax year. 

For individuals and couples with higher MAGIs, contribution limits are reduced, and no contributions are permissible if you are a single filer earning $140,000 or more or a married couple earning $208,000 or more.

Please note that these limits are subject to change in accordance with IRS regulations and market conditions. We strongly recommend consulting with a Horizon Trust or trusted financial advisor to explore all your options.

Opening a Roth IRA

Here’s a step-by-step guide on how to open a Roth IRA:

  1. Understand the Basics: Begin by grasping the fundamentals, including contribution limits, income thresholds, eligibility requirements, and the role of a Roth IRA within your overall investment strategy.
  2. Choose a Provider and Gather Supporting Documentation: Select a provider after comparing several financial institutions or brokerage firms. Consider factors like account fees, investment options, user-friendliness, and educational resources. Collect supporting documentation like your Social Security number, employment details, and bank account information.
  3. Complete the Application: Fill out the Roth IRA application provided by your chosen provider. Supply your personal information, investment preferences, and beneficiary designations, ensuring your assets are distributed according to your wishes in the future.
  4. Select Investments: With the application submitted and beneficiaries designated, choose your investments. Roth IRAs offer access to a variety of investments, including stocks, bonds, index funds (e.g. S&P 500),  all types of mutual funds, and ETFs (exchange-traded funds).
  5. Fund Your Account: After setting up your Roth IRA, make your initial contribution and establish automated deposits. You can choose to deposit lump sums or schedule automatic transfers from your checking account at regular intervals. This ‘set it and forget it’ approach helps you gradually adjust to saving over time.

Remember, seeking advice from financial professionals or tax advisors can provide valuable insights and ensure your Roth IRA aligns with your long-term financial goals.

Investing in Mutual Funds with an IRA

Thankfully, many Roth IRAs allow you to invest in mutual funds and are certified to work with mutual funds. 

Mutual funds offer a straightforward way to diversify your portfolio without having to do extensive research into individual securities. That can make it a reliable choice if you’re looking for an investment option that can be an easy-to-manage piece in your portfolio puzzle.   

If you’re considering using your IRA to invest in mutual funds, here are a few questions to ask before you invest.

What is your primary goal?

 Do you want income for your retirement, or are you looking for an investment strategy by which you can realize earnings sooner? 

Capital appreciation funds generally lend themselves to long-term growth but can be volatile upfront. That makes them a better option for investors who don’t need or want a current source of income. 

On the other hand, if your goal is to leverage mutual fund income to purchase other assets (real estate, promissory notes, etc.) through your IRA, consider income funds. This is because income funds are typically less volatile, and depending on the fund you choose, you may realize returns faster than you would through an appreciation fund.

Look at the short- and long-term picture to determine what role you want mutual funds to play in your portfolio. 

What’s your risk tolerance?

Are you okay with potentially volatile shifts in your portfolio if you invest in real estate markets like New York, Denver, or Austin? Or would you prefer something more conservative?

Each mutual fund has its own investment strategy, and it’s wise to research your options and choose one that can cater to your preferred level of risk. 

Some options, like income funds, typically carry less risk. Others, such as equity funds built on new businesses or volatile assets and companies, will present more risk. 

Fortunately, if you choose to, you can invest in multiple mutual funds, mixing riskier options that may have higher returns with less volatile ones that may have a slower rate of increase.

Do you want an active or passively managed account?

Actively managed mutual funds have managers who oversee when and how funds are invested, typically aiming to spot the best investments before they become market trends. 

Passively managed funds are driven by the market index benchmarks, like those set by the S&P 500. 

There are benefits and drawbacks to both. Actively managed mutual funds have the potential to outperform passive ones, though they may carry more risk and typically have higher fees. On the other hand, passively managed funds may carry less risk and have lower operating fees. 

Even though mutual funds are billed as an “easy-to-manage” portfolio addition, some require more attention than others. 

Tax Implications

Both Roth IRAs and mutual funds have distinct tax implications:

To start, contributions to Roth IRAs are made with after-tax income and have no required minimum distributions. This results in tax-free qualified withdrawals during retirement. If you anticipate a higher tax bracket in the future, Roth IRAs provide significant tax advantages.

Concerning mutual funds, their tax implications depend on the fund type and holding duration. Generally, investments held for less than a year are subject to tax rates equivalent to your regular income tax rates. In contrast, lower long-term capital gains tax rates apply to assets held for over a year, with rates of 0%, 15%, or 20%, depending on income and filing status.

Remember that dividends and capital gains generated by mutual funds are considered taxable income. Frequent trading in actively managed funds often results in higher capital gains than index funds or ETFs, which tend to have lower capital gains.

Additionally, consider the consequences of switching from one mutual fund to another. If this is done within a taxable account, treat the shares of the first fund as sold, potentially triggering capital gains taxes.

Please be aware that tax laws and rates are subject to change, so it’s recommended to consult Horizon Trust or a trusted tax professional/financial advisor to obtain the most up-to-date information.

Best Mutual Funds for Roth IRAs

There are several mutual funds you can invest in, and it’s important to do your research before you decide. 

Here are some of the best mutual funds to consider for your Roth IRA:

Schwab Fundamental U.S. Large Company Index Fund (SFLNX) invests in large, publicly traded companies across multiple sectors, with a portfolio that weighs heavily on financial services, technology, and healthcare.

  • Morningstar rating: 5 stars
  • Expense ratio: 0.25%
  • Average 5-year return: 12.85%
  • Minimum investment: $2,500

Fidelity Growth Discovery Fund (FDSVX) is a moderate-risk, larger-growth mutual fund with a heavy interest in information technology and communication services. 

  • Morningstar ratio: 5 stars
  • Expense ratio: 0.79%
  • Average 5-year return: 17.86%
  • Minimum investment: $0

Calvert Core Bond Fund Class A (CLDAX) is a lower-risk mutual fund that invests in several core bonds, including government, agency mortgage-backed, and corporate bonds.  

  • Morningstar rating: 5 stars
  • Expense ratio: 0.93%
  • Average 5-year return: 4.15%
  • Minimum investment: $2,500

T. Rowe Price All-Cap Opportunity Fund (PRWAX) focuses on American industries expected to have significant growth potentials, such as technology, consumer cyclical, and healthcare. It typically is of moderate risk with high returns.

  • Morningstar rating: 5 stars
  • Expense ratio: 0.76%
  • Average 5-yard return: 18.61%
  • Minimum investment: $2,500

Goldman Sachs International Equity ESG Fund Class A (GSIFX) is a foreign, large blend fund with moderate risk. Shareholders can invest in companies outside of the United States

  • Morningstar rating: 5 stars
  • Expense ratio: 1.47%
  • Average 5-yard return: 8.52%
  • Minimum investment: $1,000

When comparing a Roth IRA to a mutual fund, it’s important to remember that they play different roles in your retirement goals. A Roth IRA is an account that you contribute to and use to invest in securities.

A mutual fund is an investment class you can make and hold inside your Roth IRA, Traditional IRA, or even your SDIRA. 

If you’re considering investing in mutual funds, always take the time to research your options and ensure that the fund(s) you choose meets your short- or long-term investment goals and risk tolerance. 

As always, if you’re unsure what option is best for you, contacting a financial advisor is a good idea. 

Ready to open a Roth IRA or invest in mutual funds? Contact Horizon Trust today to get started.


What are the risks associated with Roth IRAs and mutual funds?

As with all investments, both Roth IRAs and mutual funds imply risks. Initially, the value of your investments can fluctuate due to market conditions, potentially leading to stagnant or declining portfolio values as retirement nears. Additionally, management fees imposed by mutual funds can gradually diminish your returns over time.

Furthermore, withdrawing from a Roth IRA before age 59½ triggers extra taxes and early withdrawal penalties, reducing your account’s growth potential. Ensure you fully understand the risks tied to Roth IRAs and mutual funds before making investment decisions.

Which option is more suitable for retirement savings: Roth IRA or mutual funds?

Selecting between a Roth IRA and mutual funds for retirement savings hinges on financial goals, investment strategy, and risk tolerance. Roth IRAs offer tax-efficient, diversified, and long-term investing. Conversely, mutual funds offer managed diversification by professionals, ideal if hands-on management isn’t viable.

Ultimately, the decision balances the tax benefits of a Roth IRA and the expert-managed diversity of mutual funds.

Can I have both a Roth IRA and invest in mutual funds simultaneously?

Absolutely, you can maintain a Roth IRA while investing in mutual funds. One provides tax advantages, while the other offers growth through a broader array of investment options. Both fulfill distinct purposes for achieving your long-term retirement objectives.