Can I Buy ETFs in My IRA?

Individual Retirement Accounts, or IRAs, allow you to invest pretax money for retirement purposes. Roth IRAs provide numerous advantages that include tax-free growth from investment income and share price appreciation.

ETFs have quickly become a popular way of diversifying portfolios with broad exposure to assets such as stocks, bonds and global investing. Trading similar to stocks during market hours and offering lower expenses than traditional mutual funds make ETFs an appealing way of diversification.

Taxes

ETFs have grown increasingly popular as an investment option in IRA accounts due to their lower costs and tax efficiency; ETFs that offer diversification at low costs while being tax-efficient compared to actively managed mutual funds can add up to significant long-term savings. ETFs with dividends paying out such as Schwab U.S. Dividend Equity ETF (SCHD), which invests in high-yield companies such as Broadcom AVGO and Texas Instruments TXN. are especially well suited for this investment vehicle.

ETFs should not be misconstrued as tax-free investments. ETF profits sold at a gain are taxed at long-term capital gains rates, which may reach 23.8% once including 3.8% net investment income tax (NIIT). Because of this tax liability, investors should also maintain both tax deferred (IRAs) and taxable brokerage accounts to mitigate these potential costs. IRA withdrawals will only incur a marginal tax rate when taken, eliminating much of the paperwork associated with reporting capital gains, dividends and interest income on annual tax forms.

Fees

Fees associated with your IRA investments can have a dramatic effect on your retirement savings. Management fees, for instance, can add up over time and potentially decrease account balance or increase the risk of running out of money when retiring. ETFs tend to offer lower costs than mutual funds for portfolio growth purposes.

Assuming you have a self-directed brokerage account, ETFs can be added to your IRA with ease. A transaction fee may apply when trading stock and ETF, or there may be markup/markdown fees on bond trades; or you could get 100 free online stock and ETF trades annually using U.S. Bancorp Investments Self-Directed Brokerage Account with paperless document delivery enabled, U.S. Bank SmartlyTM Checking4 and paperless document delivery enabled U.S. Bancorp Investments Self-Directed Brokerage Account* which holds basket of securities related to an index, sector or market index fund*. Learn more about our fees and charges! *Index funds are open-ended investment companies/unit investment trusts holding basket of securities related to that index/sector/market.

Investing in ETFs

ETFs offer an economical solution to diversify a portfolio and gain exposure to specific sectors of the market. Their lower management fees may make them preferable compared to mutual funds, and they trade freely throughout each trading day on stock exchanges with prices which fluctuate according to market conditions.

Investors can purchase and sell ETF units through a stockbroker, just as they would stocks or mutual fund shares. ETFs hold a basket of investments that track specific indexes, sectors or commodities.

Schwab US TIPS ETF (SCHP), for instance, invests exclusively in Treasury Inflation-Protected Securities or TIPS and boasts broad diversification, low fees and strong backing from its parent company.

Roth IRAs

IRAs are tax-advantaged investment accounts that allow you to invest pre-tax dollars towards retirement. You can open one at most financial institutions, including banks and credit unions, brokerage firms and investment companies.

Your IRA allows you to invest your savings tax-deferred, with withdrawals tax-free once retirement arrives.

ETFs can be an ideal way to diversify your IRA portfolio as they provide broad exposure across market segments and industries at a fraction of the cost associated with traditional mutual funds. But not all ETFs are created equal; some may incur higher expenses than others so it’s essential that investors compare expense ratios before making their decision.

If you’re planning to invest in an ETF via an IRA, select one that specializes in growth stocks or offers dividend income as a great strategy to maximize growth over the course of years or decades before needing access to funds. This way you’re giving your investment every edge it can get when needed most.