Can You Hold ETFs in an IRA?

Exchange-traded funds (ETFs) and mutual funds are popular investments for diversifying retirement portfolios, but each type has unique operational nuances that investors should understand in order to make wiser choices.

ETFs may be more tax-efficient than mutual funds because they do not distribute capital gains as frequently or at such high rates than certain funds do.

1. Roth IRA

Roth IRAs provide an excellent way to save for retirement and enjoy tax-free growth if you follow withdrawal guidelines, with qualified withdrawals also being tax-free.

Eligibility for Roth IRA contributions depends on an individual’s income. The maximum contribution allowed in 2024 for single filers or couples filing jointly (depending on MAGI thresholds) is $7,000.

Your Roth IRA should be managed by a financial institution that acts as its custodian, although some people prefer hiring fee-only financial planners or taking advantage of free guidance offered by their custodian company to choose investments for it. Reviewing your goals, time horizon and investment choices on an ongoing basis is key in making wise choices with your Roth IRA investments; remember all investments can involve risk, including potential loss of principal. Please note: the tax-free withdrawal benefit only applies for accounts opened after January 1, 2018, not accounts that contain conversions from traditional or Roth 401(k).

2. Traditional IRA

Traditional IRAs can hold almost any investment type, such as stocks, bonds, mutual funds, annuities, unit investment trusts and exchange-traded funds – unlike 401(k) plans where most employers only allow employees to select from limited choices available, the options with an IRA offer the ability to invest across a broad spectrum of offerings.

ETFs are an increasingly popular option among IRA investors because they provide an economical way of diversifying one’s portfolio. Many investors also utilize income-paying ETFs as an effective way of increasing dividends and retirement with a steady source of revenue.

As with other investments, ETFs in an IRA may be subject to capital gains tax when shares are sold and high-income investors may incur the 3.8% net investment income (NII) Medicare tax. A good self-directed IRA custodian can help ensure Gold ETF investments adhere to IRS guidelines and maintain your account’s tax-advantaged status; or alternatively you could opt for a robo-advisor that uses automated technology to build and manage an ETF portfolio tailored specifically to your goals and timeline at a fraction of what a traditional investment manager would charge.

3. SEP IRA

Simplified Employee Pension plans (SEP IRAs) are retirement accounts specifically tailored for self-employed people and small business owners with few employees. Similar to a traditional IRA, a SEP IRA allows its employer to defer taxes on contributions and investment growth; however, withdrawals after retirement will be taxed as ordinary income.

SEP IRAs also boast higher contribution limits than both traditional and Roth IRAs, and the ability to deduct contributions from your taxable income for any given year. It’s simple and quick to set up one – most brokers provide this service after filling out one simple IRS form.

Small business owners with several employees can contribute the same percentage of each qualifying employee’s compensation (including their own) to SEP IRAs, including themselves. These accounts may be invested in stocks, mutual funds and ETFs; for those looking for long-term goals it may be wise to prioritize stock index funds while those impatient with market fluctuations and shorter goals might prefer bond fund investments instead.

4. SIMPLE IRA

A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a retirement plan that helps small businesses save money through pre-tax deductions and matches some employee contributions. It’s simple for employers to administer and manage, while there may be restrictions as per IRS rules: you must employ 100 or less people in order to offer one; additionally employees cannot have multiple qualified retirement accounts with their employer at any given time.

Terry, owner of a home remodeling company, can reduce employer matching contributions as low as one percent during the first two years of her SIMPLE IRA plan. Thereafter, however, she must maintain it at three percent or greater or risk her plan becoming non-SIMPLE and incurring strict guidelines and an early withdrawal penalty of 10% for participants wanting to roll over money into it.


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