What is the difference between a mutual fund and an IRA?
May 7th, 2010
I’m saving for the long run……..if I put the money in a mutual fund can I make withdrawels ( if necessary ) without restrictions or financial penalties?…….but if I put it in an IRA, i can’t touch until 59 1/2 years of age?
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For mutual fund investments…you will be TAXED on the gain (either short-term or long-term capital gains) on the shares you sold (increased in value from the time you bought them), and you are free to do so at any time. You will also be taxed on any income or dividends paid on your shares, in the year received, as ordinary income.
An IRA does tie it up, but you pay nothing for gains or income on the IRA account until the time you start making your withdrawals later in life.
Don’t buy mutual funds for the long run. They’re not good investments. The problem is the fees that are involved. A mutual fund is a pool of money from a number of investors which is then invested and managed by a fund manager and usually his/her employees. This inherently means you get lower returns than if you bought stocks.
The reason is, the fund manager and employees all have to get paid, which cuts into your earnings. This makes them less attractive, so they often pay advisers to recommend them. This further cuts into your earnings. As a result, stocks are a much smarter option. The IRA isn’t a bad idea, and there are different kinds of IRAs you can invest in.