How to Invest in a Roth IRA Mutual Fund
A Roth individual retirement arrangement is an investment account with special tax advantages. You do not have to pay taxes on income and earnings in your Roth as they accrue, and you usually don't have to pay tax when you take withdrawals. In this way, a Roth is distinct from a taxable investment account, in which you have to pay taxes annually on your investment gains. With certain limited restrictions, you can buy many of the same investments in a Roth IRA that you can in a regular account, however, including most mutual funds.
- Difficulty:
- Moderately Easy
Instructions
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1
Open a Roth IRA. If you have an existing relationship with a financial services firm, your adviser or one of the firm's representatives will be able to help you with opening an account. Otherwise, most banks and brokerage firms should be able to open an account for you, as long as you are eligible. You can contribute to a Roth only if you have taxable compensation for the year and your modified adjusted gross income falls below certain levels. For example, in 2011 you could not contribute to a Roth IRA if you were married and filing jointly with a modified adjusted gross income of $177,000 or higher. Make sure your initial contribution is less than the IRS maximum, in Internal Revenue Service Publication 590. As of 2011, the maximum Roth contribution for those under age 50 was the lesser of $5,000 or the amount of your total compensation.
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2
Research mutual funds. As you would if you were buying a mutual fund in a regular investment account, look for a mutual fund that best serves your investment objectives and financial goals. Ratings services such as Morningstar offer opinions on funds and describe their investment objectives and past performance in detail. Funds with a greater potential for higher returns also carry commensurate risk, so look for a fund that not only performs well, but also fluctuates in value in a range you can tolerate. You should also look for funds with low fees and expenses.
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Check fund minimums. Most mutual funds have minimum investment, but many lower this minimum for purchases within an IRA, including a Roth IRA.
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Consider a fund that is not tax-efficient. In regular investment accounts, you may prefer a mutual fund that minimizes taxable distributions, such as capital gains and interest or dividends. In a Roth IRA, none of these distributions is taxable. Funds unsuitable for a taxable account may make more sense in a Roth IRA.
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Buy the fund, either by placing your order with a financial adviser, or through the company's website if you prefer. Specify the name of the fund, the dollar amount and that the purchase is for a Roth IRA.
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Get a confirmation. Your confirmation is the written evidence that you bought the fund for tax reporting. It should include the date of the transaction, the amount, the name of the fund, the number of shares you purchased and that the account is a Roth IRA account.
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