Can You Have Mutual Funds in a Roth IRA?

By Rebecca Lake. January 26, 2025 · 12 minute read

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Can You Have Mutual Funds in a Roth IRA?

A Roth IRA is a tax-advantaged investment account designed for retirement savings, and a mutual fund is a type of pooled investment that might be found within an IRA.

It may help to think of a Roth IRA as the container that can hold a variety of investments, including shares of mutual funds, which are baskets of securities (like stocks, bonds, or other assets). Like other IRAs, a Roth IRA offers certain tax advantages when saving for retirement.

A mutual fund, on the other hand, is a type of security investors may purchase for their IRA or other type of portfolio. Mutual funds hold a range of securities, and may be actively managed or passively managed. Passive funds are also known as index funds.

Key Points

•  A Roth IRA is a tax-advantaged retirement account funded with after-tax money.

•  A mutual fund is an investment that can be held within a Roth IRA, as well as other types of investment and retirement accounts.

•  A Roth IRA has annual contribution limits. Roth IRAs are also subject to income limits; if you exceed the IRS income limits, you can’t fund a Roth.

•  Mutual funds are pooled investment funds that can hold a range of securities (e.g., stocks, bonds, cash, and more).

•  There are no annual limits or income restrictions on purchasing mutual fund shares.

What Is a Roth IRA?

A Roth IRA is an individual retirement account that you can open independently of a workplace retirement plan. Because a Roth is funded with after-tax contributions — versus a traditional IRA, which is considered pre-tax, or tax deferred — qualified withdrawals from a Roth IRA are tax free in retirement.

If you open a Roth IRA or a traditional IRA, there are specific rules and restrictions that come with these accounts. There are also certain advantages, especially when saving and investing for retirement.

Roth IRAs have annual contribution limits, just like traditional IRAs and SIMPLE or SEP IRAs (which are designed for self-employed individuals and small business owners).

The maximum annual contribution limit for a Roth IRA in 2024 is $7,000, or $8,000 with the $1,000 catch-up contribution amount for those age 50 or older. For tax year 2025, the contribution limits are unchanged for traditional and Roth IRAs.

As noted above, a Roth IRA can act as a container for a portfolio of assets, including mutual funds.

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What Is a Mutual Fund?

A mutual fund is a type of pooled investment that is often compared to a basket of securities. It’s not an investment account, but a type of investment itself. Mutual funds may include stocks, bonds, cash or cash equivalents, commodities, and other securities.

Investors typically buy shares of a mutual fund, which provides a level of exposure to a variety of companies or assets, thus offering some basic diversification.

Unlike stocks, which trade throughout the day, mutual fund shares only trade once per day, at the end of the day.

This quick guide to mutual funds explains the basics, and there are more details below about how a mutual fund works.

Recommended: What Is Portfolio Diversification?

How a Roth IRA Works

Roth IRAs are more complicated than traditional IRAs, because they not only come with the standard annual contribution limits, there are also income restrictions that pertain only to Roth IRAs.

In addition, Roth IRAs are subject to a different kind of tax treatment than other types of IRAs.

Tax Advantages of a Roth IRA

Roth IRAs are funded with after-tax dollars. This means you don’t get an upfront tax deduction for Roth IRA contributions the way you would with a traditional IRA. However, you do get the benefit of tax-free withdrawals beginning at age 59 ½.

A Roth IRA also offers the following advantages:

•  Tax-free investment growth over time.

•  Penalty-free and tax-free withdrawals of original contributions at any time.

•  You’re not required to take money from your account starting at age 73, as you are with a traditional IRA.

•  Money can remain in your Roth account indefinitely and be passed on to one or more beneficiaries.

Contribution and Income Rules

Anyone with earned income can contribute to a Roth IRA, as long as their modified adjusted gross income (MAGI) is within certain limits.

Here’s a table showing what you can contribute for tax year 2024 and tax year 2025, based on your modified AGI and filing status. You can also use an IRA eligibility calculator to determine your contribution amount.

 

If you are… And your modified AGI for tax year 2024 is… And your modified AGI for tax year 2025 is… You can contribute…
Married and file jointly or are a qualifying surviving spouse Less than $230,000 Less than $236,000 Up to $7,000 per year, $8,000 if you’re 50 or older
More than $230,000 but less than $240,000 More than $236,000 but less than $246,000 A partial amount
More than $240,000 More than $246,000 No contribution
Married, file separately, and you lived with your spouse at any time during the year Less than $10,000 Unchanged A partial amount
More than $10,000 Unchanged No contribution
Single, the head of household, or married and filing separately but you did not live with your spouse at any time during the year Less than $146,000 Less than $150,000 A full contribution
More than $146,000 but less than $161,000 More than $150,000 but less than $165,000 A partial amount
More than $161,000 More than $165,000 No contribution

Roth IRA Withdrawal Rules

When you’re ready to withdraw money from your Roth IRA, there are some rules to know. To make a tax- and penalty-free Roth IRA withdrawal, you must:

•  Be 59 ½ or older

•  Have had your Roth IRA for five years or more, also known as the five-year rule

The IRS allows you to withdraw original contributions from your Roth IRA at any time, with no taxes or penalties. But if you need to take an early distribution of earnings, you’d owe ordinary income tax on the amount of earnings withdrawn.

You’d also pay a 10% early withdrawal penalty on the earnings withdrawn unless you qualify for one of the following exceptions:

•  You’re withdrawing the money to pay for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income.

•  You need the money to cover medical insurance while you’re unemployed.

•  You’re withdrawing funds to pay for qualified higher education expenses.

•  The distribution is part of a series of substantially equal periodic payments.

•  You’re a domestic abuse survivor and withdraw less than $10,000.

•  The IRS levies your Roth IRA to satisfy a tax debt.

•  You’re taking a distribution to fund the birth or adoption of a child.

•  You’re a military reservist on active duty.

•  You’re using the money for expenses related to qualified disaster recovery.

•  You become totally and permanently disabled.

•  You withdraw up to $10,000 towards the purchase of a home.

The 10% penalty is also waived if your Roth IRA beneficiary withdraws money early because you’ve passed away. Because IRA rules are subject to change, it’s wise to consult with a professional, or check IRS.gov, for updates.

How a Mutual Fund Works

If you choose to invest in a mutual fund in your Roth IRA, or in any type of retirement account or taxable account, it’s important to understand the wide variety of mutual funds available.

Active vs. Passive Mutual Funds

The first point of distinction in the world of mutual funds is the difference between active management and passive management.

•  Active investing refers to a strategy where human portfolio managers oversee the fund’s portfolio, and pick investments they believe will outperform the market.

•  By contrast, passive investing doesn’t involve live portfolio managers. This strategy relies on an algorithm to mirror the performance of certain market sectors or indexes.

Passive investing is also known as index investing, as the fund’s portfolio tracks an index. For example, the S&P 500 index tracks the performance of the top 500 biggest companies in the U.S. The Dow Jones Industrial Average (often called the Dow) tracks 30 top industrial companies. The Nasdaq composite index tracks over 3,000 companies mainly in the tech sector.

Types of Mutual Funds

Mutual funds are then categorized by what they hold. Some of the most common types of mutual funds include:

•  Stock mutual funds, which concentrate holdings in corporate stocks

•  Bond funds, which are focused on different types of bonds

•  Money market funds, which hold short-term investments issued by corporations and government entities

•  Target-date funds, which adjust their asset allocation based on the investor’s target retirement date

Within those categories, you’ll find plenty of variety. For example, some stock funds invest exclusively in growth stocks or large-cap companies, while others primarily hold stocks that pay dividends to investors.

Bond funds may center on corporate bonds, municipal bonds, green bonds, or a mix of different bond types.

Fees and Expenses Associated With Mutual Funds

Mutual funds have fees, which reduce the returns you earn. Before you buy a mutual fund, it’s important to review the prospectus so you know what you’ll pay. Some of the most common mutual fund fees include:

•  Sales loads

•  Redemption fees

•  Exchange fees

•  Purchase fees

•  Account fees

•  Management fees

•  Distribution fees

If you’re confused by the various fees, it may be easier to focus on the expense ratio. The expense ratio, which is expressed as a percentage, represents the fund’s total operating expenses. The lower this number is, the less you’ll pay to own the fund. For example, there’s a noticeable difference in the amount you’ll pay annually when your fund’s expense ratio is 0.02% vs. 0.20%.

A $10,000 investment in a mutual fund with an expense ratio of 0.02% would cost $200 per year; an expense ratio of 0.20% would cost $2,000 per year, hypothetically.

Roth IRAs and Mutual Funds: Key Points to Know

When considering investing in mutual funds through a Roth IRA account, it’s important to understand how each of them works, since you’re talking about two separate things. Here’s a table that highlights the main points to know about each.

 

Roth IRA Mutual funds
What it is A tax-advantaged investment account that’s designed for retirement. A pooled investment vehicle that holds a collection of securities.
How it’s taxed Roth IRAs offer tax-free qualified withdrawals beginning at age 59 ½, with no required minimum distributions at any age. Mutual funds are subject to capital gains tax when held in a taxable account; funds held in a Roth IRA are subject to Roth IRA tax rules.
Who it’s for Individuals who want to save for retirement on a tax-advantaged basis, and who meet the IRS income guidelines. Individuals who want to gain exposure to a broad range of investments in a single vehicle.

Investing in Mutual Funds Within a Roth IRA

One misconception is that you have to choose between a Roth IRA or mutual fund to invest in; in reality, you can do both. You can hold one or more mutual funds inside a Roth IRA (or any type of IRA). You can also invest in mutual funds within a taxable brokerage account outside of your Roth.

Types of Funds to Consider

When you open a Roth IRA, you’ll have to decide what you want to invest in. Your brokerage will likely offer you a selection of mutual funds to choose from, including:

•  Index funds

•  Bond funds

•  Growth funds

•  Dividend funds

Your choice of funds can depend on your risk tolerance and overall objectives. If you’re in your 30s and have years to invest, for instance, you might be comfortable with more aggressive growth funds.

Once you reach your 60s, on the other hand, you may want to shift more of your assets into bond funds to minimize risk.

As you compare fund options, consider:

•  Historical performance

•  Risk profiles

•  Expense ratios

It’s also important to look at the underlying holdings of each fund so you understand what it owns and how often investments turn over.

Can you lose money in a Roth IRA? Yes, if your investments don’t perform as well as you expected when the market is down. When selecting mutual funds for your Roth IRA account, remember that past performance isn’t a guaranteed indicator of what a fund will do in the future.

Asset Location and Tax Efficiency

Should you keep mutual funds in a Roth IRA? It can make sense from a tax perspective. Funds held within your Roth IRA are subject to Roth taxation rules. That means qualified withdrawals are tax free, starting at age 59 ½.

If you were to hold mutual funds in a taxable brokerage account, on the other hand, you’d likely owe capital gains tax if you sold your shares at a profit.

Rebalancing and Portfolio Management

Rebalancing means reevaluating your portfolio’s asset allocation and buying or selling assets as needed to maintain your ideal mix of assets. It’s usually a good idea to rebalance at least once a year to make sure that you’re maintaining the right mix to meet your goals.

For example, say that you prefer a 70% to 30% split between stocks and bonds in your Roth IRA. Over the past year, that split may have crept closer to 60/40, and you feel you’re missing out on returns. You might sell some of the bond funds in your account and replace them with growth or dividend funds instead.

Rebalancing doesn’t trigger tax consequences since a Roth IRA is tax-advantaged. If you’re not sure what you should be doing to keep your asset allocation aligned, you may want to get help from a financial advisor.

The Takeaway

With the clarification that a Roth IRA is a type of tax-advantaged retirement account, and a mutual fund is a type of investment that can be held within an IRA, it may be easier to take the next step with your own investment plans.

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FAQ

Can you invest in both a Roth IRA and mutual funds?

Yes, in that you can open a Roth IRA account, and purchase mutual fund shares within the IRA account. But an IRA is not a type of investment, whereas a mutual fund is. You would invest your money in a mutual fund or other type of asset, and you could then hold those investments in the Roth or traditional IRA account.

What are the contribution limits for a Roth IRA and for a mutual fund?

Roth IRAs are subject to annual contribution limits, as determined by the IRS; mutual funds are not. For 2024 and 2025, the maximum contribution to a traditional or Roth IRA is $7,000; $8,000 if you’re age 50 or older. Mutual funds have no maximum contribution limit, though there may be a minimum contribution required to invest in a fund.


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