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Roth IRA vs. Mutual Fund
A Roth IRA is a retirement account, while a mutual fund is an investment you can hold inside that account.
Deciding how to grow your savings for the future often comes down to choosing the right investment tools. Roth IRAs and mutual funds serve different purposes — one as a retirement account with tax benefits, the other as an investment vehicle for diversification. By understanding how they work and their unique advantages, you can determine which fits your financial goals.
Roth IRA vs. mutual funds: At a glance
| Roth IRA | Mutual Funds |
|---|---|
| A Roth IRA is a tax-advantaged retirement account that allows your investments to grow tax-free. | Mutual funds are professionally managed portfolios that pool money from multiple investors to buy securities like stocks and bonds. |
| Contributions grow tax-free, and withdrawals in retirement are not taxed. Early withdrawals may incur penalties unless specific conditions are met. | Mutual funds held in taxable accounts are subject to capital gains taxes, but those within a Roth IRA or other tax-advantaged accounts grow tax-free. |
| Designed to help you save for retirement with long-term tax benefits. Contributions are capped annually. | Flexible enough to support both short- and long-term financial goals, including wealth building and income generation. |
| Access to funds is limited until retirement age (59.5) unless you qualify for an exception. | Can be accessed in taxable accounts at any time, making them more liquid than Roth IRAs. |
| A Roth IRA allows you to invest in mutual funds, exchange-traded funds (ETFs), stocks, bonds and more, depending on the provider. | Primarily focuses on diversified portfolios, with active or passive management tailored to investor goals. |
What are mutual funds?
Mutual funds are professionally managed investment portfolios that pool money from multiple investors to purchase a diversified mix of assets like stocks, bonds and other securities. Each investor owns shares representing a portion of the fund’s holdings.
Mutual funds are designed to reduce risk by spreading investments across various asset classes. They are managed either actively, where professionals aim to outperform the market, or passively, where the fund tracks a specific index. These funds are accessible through taxable accounts, retirement accounts or other investment platforms, making them versatile for various financial goals.
Pros
- Diversification. By pooling investments, mutual funds reduce the risk tied to individual stocks or bonds. This approach spreads your exposure across various asset classes, making them a safer choice for conservative investors.
- Professional management. Actively managed mutual funds rely on experienced fund managers who handle the research, buying and selling of securities. This can save time and provide peace of mind for investors.
- Accessibility. Mutual funds are available through most brokers, taxable accounts and retirement plans. Their low minimum investment requirements make them suitable for both new and seasoned investors.
- Customizable options. Investors can choose from funds tailored to specific goals, such as growth, income or sector-specific themes. This flexibility makes them versatile for various financial strategies.
Cons
- Fees. Actively managed funds often have higher expense ratios due to the costs of professional management. Over time, these fees can erode a significant portion of your returns.
- Limited control. Investors have no direct say in the fund’s underlying investment decisions. All choices, including asset selection and trading, are made by the fund manager.
- Tax implications. Mutual funds can generate capital gains distributions, even if you don’t sell your shares. This can lead to unexpected tax bills for funds held in taxable accounts.
- Market risk. Despite diversification, mutual funds are not immune to market downturns. In volatile markets, even a well-diversified mutual fund can experience losses.
What is a Roth IRA?
A Roth IRA is a retirement account that allows your investments to grow tax-free, with qualified withdrawals in retirement also free from taxes. Funded with after-tax dollars, it doesn’t provide an immediate tax deduction but offers significant long-term benefits.
Roth IRAs allow you to invest in a wide range of assets, including mutual funds, ETFs, stocks and bonds, enabling you to build a diversified portfolio tailored to your retirement goals.
In 2024 and 2025, annual contribution limits are $7,000 for individuals under 50, with an additional $1,000 allowed for those aged 50 and older. Income limits also apply, with eligibility phasing out for single filers starting at $146,000 in 2024 and $150,000 in 2025. For joint filers, the phase-out begins at $230,000 in 2024 and $236,000 in 2025.(1)
By offering tax-free growth and flexible investment options, Roth IRAs are an excellent tool for long-term retirement savings.
Pros
- Tax-free growth. Investments in a Roth IRA grow tax-free and qualified withdrawals in retirement are also tax-free. This can lead to significant tax savings over the long term.
- No required minimum distributions (RMDs). Unlike traditional IRAs, Roth IRAs don’t require you to withdraw funds at a certain age, allowing your investments to continue growing indefinitely.
- Flexible withdrawal options. Contributions (not earnings) can be withdrawn at any time without taxes or penalties, making Roth IRAs more accessible in emergencies.
- Diverse investment options. You can invest in a wide range of assets, including mutual funds, ETFs, stocks and bonds, giving you control over your retirement portfolio.
Cons
- Income limits. Roth IRAs have income restrictions, with eligibility to contribute phasing out for high earners. For 2024, single filers earning over $161,000 and joint filers earning over $240,000 cannot contribute directly.
- No immediate tax deduction. Contributions are made with after-tax dollars, meaning you don’t get a tax break upfront as you would with traditional IRAs. This may deter those seeking immediate tax relief.
- Contribution limits. Annual contributions are capped at $7,000 (or $8,000 for those aged 50 and older) as of 2024, which may not be enough for those with aggressive savings goals.(2) Higher earners may find this limit restrictive compared to other investment vehicles.
- Penalty for early withdrawals on earnings. While contributions can be accessed without penalties, withdrawing earnings before age 59.5 typically incurs taxes and a 10% penalty unless specific conditions are met.
What is the difference between an IRA and a Roth IRA?
An Individual Retirement Account (IRA) is a tax-advantaged account designed to help individuals save for retirement. Traditional IRAs allow for tax-deductible contributions, but withdrawals in retirement are taxed as ordinary income.
In contrast, Roth IRAs are funded with after-tax dollars, meaning contributions aren’t tax-deductible, but qualified withdrawals in retirement are tax-free. Roth IRAs also don’t have required minimum distributions (RMDs), while traditional IRAs require RMDs starting at age 73. Additionally, Roth IRAs offer more flexibility, as contributions (but not earnings) can be withdrawn at any time without penalty.
Traditional IRAs may suit those seeking an immediate tax break, while Roth IRAs are ideal for individuals expecting to be in a higher tax bracket in retirement. Both accounts have the same annual contribution limits, but income eligibility rules for Roth IRAs may limit access for high earners.
Roth IRA vs. mutual funds: Which is better?
Deciding between a Roth IRA and mutual funds depends on your financial goals and personal circumstances. While Roth IRAs are tailored for long-term retirement savings with significant tax advantages, mutual funds offer broader flexibility and accessibility for various investment objectives.
A Roth IRA is better for retirement savings with tax-free growth
Roth IRAs provide a unique advantage for retirement savings by offering tax-free growth and withdrawals. Since contributions are made with after-tax dollars, the money in the account, including earnings, is not taxed when withdrawn in retirement.
A structure like this is particularly beneficial for those who want to reduce their tax burden in the future, especially as their savings compound over decades. By eliminating taxes on retirement withdrawals, Roth IRAs can help maximize income for long-term financial stability.
A Roth IRA is ideal for those expecting higher tax brackets in retirement
If you anticipate being in a higher tax bracket in retirement, a Roth IRA can help you save on taxes in the long run. By paying taxes on contributions now at a potentially lower rate, you can withdraw funds tax-free in retirement when your income and tax obligations may be higher.
With this approach, you lock in today’s lower tax rate, providing greater financial predictability and minimizing your tax burden during retirement. It’s especially valuable for younger investors early in their careers.
A Roth IRA is better for estate planning since heirs inherit tax-free
Roth IRAs offer a significant advantage for estate planning by allowing your beneficiaries to inherit funds tax-free. Unlike traditional IRAs, which require heirs to pay income taxes on withdrawals, Roth IRAs ensure that distributions remain untaxed.
This feature preserves more of your wealth for future generations. Additionally, the fact that Roth IRAs have no required minimum distributions (RMDs) during the account holder’s lifetime allows the balance to grow tax-free for an extended period, further benefiting your heirs.
Mutual funds in taxable accounts are better for accessing money before retirement
Mutual funds held in taxable accounts provide flexibility unmatched by Roth IRAs, as there are no restrictions or penalties for accessing funds.
If you need liquidity for unexpected expenses, short-term goals or investment opportunities, you can sell shares at any time. This accessibility makes mutual funds an ideal choice for investors who may need their money before reaching retirement age. Unlike Roth IRAs, there’s no waiting period or qualifying event required to access your funds.
Mutual funds offer more flexibility for short-term financial goals.
Mutual funds are well-suited for short-term financial goals, such as saving for a home, funding education or building an emergency fund.
Unlike Roth IRAs, which are designed for retirement savings with restrictions on early withdrawals, mutual funds allow you to access your money at any time. This flexibility, combined with the ability to choose funds aligned with specific time horizons and risk tolerances, makes them a versatile option for investors with shorter-term objectives.
Mutual funds may suit those who want to invest more than annual IRA limits
Roth IRAs have strict annual contribution limits of $7,000 (or $8,000 for those aged 50 and older) in 2024 and 2025 — in many instances, this may not be sufficient for aggressive savers.
Mutual funds, on the other hand, have no contribution limits, allowing you to invest as much as you like. This makes them an excellent choice for high-income individuals or those looking to allocate a substantial amount of their portfolio to diversified investments without the constraints of retirement account rules.
Compare the Roth IRA accounts
When selecting a Roth IRA, it’s essential to compare account features, such as investment options, fees and contribution limits. Different providers may offer unique benefits like lower management costs, a broader range of investments or tools to help you plan for retirement effectively.
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What is the Finder Score?
The Finder Score crunches 147 key metrics we collected directly from 18+ brokers and assessed each provider’s performance based on nine different categories, weighing each metric based on the expertise and insights of Finder’s investment experts. We then scored and ranked each provider to determine the best brokerage accounts.
We update our best picks as products change, disappear or emerge in the market. We also regularly review and revise our selections to ensure our best provider lists reflect the most competitive available.
Bottom line
Roth IRAs and mutual funds both offer unique benefits, making them valuable tools for building wealth. Roth IRAs provide tax-free growth and withdrawals, ideal for retirement savings, while mutual funds offer flexibility and accessibility for short- or long-term goals.
Choosing between them — or combining them — depends on your financial situation and goals. Explore the best Roth IRA accounts to start planning your future.
Frequently asked questions
Is it better to have an investment account or a Roth IRA?
It depends on your financial goals. A Roth IRA is better suited for long-term retirement savings due to its tax-free growth and withdrawals, whereas an investment account offers more flexibility and no contribution limits, making it ideal for short-term goals or those who exceed Roth IRA income or contribution caps.
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