Can I Buy an ETF for an IRA?

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If you own an individual retirement account, you can invest it in everything from individual stocks, options, mutual funds, money markets and certificates of deposit to exchange-traded funds, or ETFs. In fact, trading ETFs, whether for the short or long term, differs little, at least in execution, from buying and selling stocks. Before loading your IRA with ETFs, though, consider several points.

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Definition

  • ETFs share several key similarities with mutual funds. As with mutual funds, you have a wide variety of ETFs you can choose from. Each comes with its own investment style and objectives, reflected in its slate of holdings. Some ETFs aim to mirror the returns of key market indexes, while others focus on certain economic sectors or parts of the globe. You buy shares in an ETF just as you do with a stock or mutual fund. Because ETFs trade on an exchange, meaning you can buy and sell them throughout the trading day, they function more like stocks than mutual funds from a trading standpoint.

Process

  • If you hold an IRA in a brokerage account, you probably have access to the range of investments your firm gives you access to. When you want to add an ETF to your brokerage IRA, simply find its ticker symbol and enter it on the same page you would use to trade a stock. If you don't trade online and prefer to use an automated phone system or live broker, follow the prompts to buy an ETF. When you wish to sell an ETF, you place a sell order, which will be executed during the trading day, as long as somebody agrees to buy the shares.

Taxes

  • Investors who use both tax-sheltered accounts such as IRAs and taxable accounts often aim to keep investments that trigger taxable events in the IRA. You don't need to have this concern with ETFs. While you can choose to include an ETF as part of your IRA investment strategy, don't make this choice for tax purposes. Because ETFs turn over their holdings less frequently than most mutual funds and produce fewer capital gains distributions, they serve as tax-efficient investments.

Considerations

  • In addition to tax implications, ETFs differ from mutual funds in other ways. While both will help diversify your IRA portfolio, ETFs don't have minimum initial investment requirements, as mutual funds do. You can buy one or 100 shares of an ETF, as you do with a stock. In addition, ETFs make sense if you seek to limit expenses. ETF expense ratios tend to be low, helping you take full advantage of the profit potential of long-term IRA investing.

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