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 a plethora of options to choose from for retirement savings accounts, including self-directed IRAs, pension plans, social security payments, or 401ks. 

Two of the most popular retirement vehicles remain the Roth IRA and mutual fund investments. 

Roth IRAs and mutual funds are two excellent retirement vehicles that promise better returns and a lower tax burden than a 401k or pension plan.

These investment accounts are also more lucrative and can better support your retirement than social security payments. 

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 that allows you to contribute up to $6,500 ($7,500 for investors 50 years or older) 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 investing in your desired assets. 

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

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 at one time. 

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. As a result, mutual funds are a popular compound interest investment for the passive investor. 

If you invest in a mutual fund, the management firm determines how and where your money is invested, and you’ll need to pay operational or management fees. 

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

 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

Consult with Horizon Trust

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, you may want to 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, 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 business 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, there are some that require more attention than others. 

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 cyclicals, 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 can 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 not sure what option is best for you, it’s a good idea to contact a financial advisor. 

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