How to Invest in IRA Mutual Funds

By eHow Personal Finance Editor

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Planning for retirement is a hot topic for aware adults. To plan for retirement, many individuals choose to invest in Individual retirement accounts (IRAs) with mutual fund options. By doing so, you can combine the money you have to invest with funds from other investors, boosting your retirement savings. Depending on your particular IRA, you may have several mutual fund options from which to choose.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

  • Income to invest

Types of IRAs

Step1
Understand that there are many different types of IRAs. Traditional and Roth are the most common.
Step2
Recognize that the amount you contribute to a traditional IRA is subtracted from your taxable income, reducing your tax liability.
Step3
Keep in mind that IRA withdrawals are subject to income taxes and a 10 percent penalty if you withdraw funds before you reach 59 years of age. There are, however, exceptions and you may be able to make a hardship withdrawal without incurring a penalty.
Step4
Understand that Roth IRAs are not tax-deductible. However, they are more flexible than traditional IRAs and allow for withdrawals, after five years, without taxation or penalties, as long as you meet certain requirements.

Understanding IRS Mutual Funds

Step1
Know that IRA mutual funds allow you to save for retirement on a tax-deferred or tax-free basis. At the same time, you can invest in mutual funds, potentially increasing the money you'll have to fund your retirement.
Step2
Recognize that IRAs treat all earnings in the same manner. This means that capital gains, interest and dividends are all handled in the same way.
Step3
Understand that retirement plans are not liable for taxes when earnings are received. However, unrelated business income may be treated differently.
Step4
Understand that all distributions from an IRA with mutual funds are handled in the same way. If you meet the criteria for tax-free distributions, all distributions will be tax-free, regardless of their origin. For other plans, earnings, regardless of their origin, are taxable as ordinary income.
Step5
Recognize that with an IRA mutual fund, you have the option of having monthly contributions automatically withdrawn from your bank account. This can make investing easier.

Tips & Warnings

  • Remember that mutual funds are not FDIC insured; there are risks involved with IRA mutual funds. Determine whether the risks outweigh the benefits.
  • If your IRA is set up by your employer, the employer will typically decide whether or not mutual funds will be offered and which funds will be available.
  • The stock market tends perform better than money markets or certificates of deposit (CDs).

Comments

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on 9/18/2007 In general, tax efficiency is an attractive characteristic for a mutual fund. However, in a IRA account, tax efficiency is irrelevant and this is where you could make asset allocation changes without incurring a tax liability.

Michael A. Weiss, CFA
The Editor
The Mutual Fund Investor
http://www.mutualfundinvestor.net

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eHow Article:  How to Invest in IRA Mutual Funds

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