With so many different portfolio options available, it can get confusing to figure out what everything means and what's best for your investment goals. IRAs, ETFs, index funds and mutual funds are some of the acronyms and other non-alphabet options. Before making an investment decision, get everything spelled out and figure out what's the best mix for your soup.
Mutual funds and IRAs are completely different instruments, but they can be related -- money allocated for an IRA can be invested in a mutual fund. A mutual fund is a pool of investors' money that is invested in different stocks. The investors own shares in the fund and have an interest in all of the stocks that the mutual fund owns. An IRA, or individual retirement arrangement, is a government-regulated account that allows individuals to put money away for retirement at a tax advantage.
In a standard mutual fund, investors pay taxes on any increases when they sell their shares. If they lose money, they can claim a tax deduction against any gains they made through other investments. Through IRAs, individuals have the opportunity to invest with a tax benefit. If an individual invests her IRA allotment into a standard mutual fund under the IRA requirements, she does not have to pay taxes on the income when she sells. She may also be eligible for a tax deduction that year for this investment.
Investors can contribute whatever they please into a non-IRA mutual fund, which is not regulated by the government. IRAs are subject to government stipulations about how much can be invested. Investors 49 and younger can contribute up to $5,000 annually to an IRA account, while those 50 and older can contribute $6,000 annually. This amount can be invested in any type of instrument, including stocks, bonds and mutual funds.
Shares in a mutual fund can be bought and sold on the whim of the investor. IRAs, however, are subject to government regulations. If you withdraw money from your IRA before age 59 1/2, you'll be subject to a 10 percent penalty. And if you withdraw before retirement, you'll subject to income tax on returns. You must begin to withdraw by age 70 1/2, or the IRS will take half of your annual withdrawal allowance.
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