Roth IRA vs Mutual Fund: Choosing the Right One for You

posted on Monday, October 11, 2021 in Announcements

Financial Blog | Woman looking at papers on a table

Investing is a great way to prepare for retirement. It enables you to increase your money’s value and potentially grow your fortune. While there are various investment opportunities to choose from, let’s narrow it down to two—Roth IRAs and mutual funds.

If you’re wondering which one is better, there’s really no one way to tell, as these financial products differ in several ways. For instance, a mutual fund is a pool of money collected from individuals, looking to invest in stocks, bonds, and other assets. Meanwhile, Roth IRA is a type of retirement savings account where you can keep bonds, stocks, and even mutual funds.

If you can’t choose between a Roth IRA and a mutual fund, consult a financial advisor to help you identify which will work best for your long-term goals. In the meantime, here are crucial things you need to know about these investment options:

Roth IRA

A Roth IRA is a type of individual retirement account that enables you to save a portion of your after-tax income up to a set limit. All contributions made, including interest, dividends, capital gains, etc. are completely tax-free. However, account holders are not allowed to withdraw their profits until the age of 59 ½. Doing so will equate to a 10% tax penalty.

As of 2021, contribution limits are capped at $6,000 for individuals 49 years and below; and $7,000 for ages 50 years and above. It’s also important to note that only “earned income”, or money earned from employment counts as contributions. This includes wages, salaries, commissions, and self-employment earnings. Anything other than that i.e. child support, social security benefits, rental property income, alimony, etc., are considered as “unearned income.”

Mutual Funds

As defined earlier, a mutual fund is a financial vehicle that enables investors to buy securities like stocks, bonds, and other assets. Funds are easier to access and track as they’re presided over by professional money managers, who are in charge of monitoring the assets and creating investment strategies. They are also given the power to decide when to buy and sell securities.

Mutual funds can be navigated in two ways. Through passive management, which mirrors a specific market index, in an attempt to replicate its performance. Or, through active management, which involves constantly buying and selling assets in an attempt to outmatch a market index.

Invest in Your Future with a Credit Union IRA!

At Community 1st Credit Union, we’ll provide you everything you need to know to get started with your investment account. We offer Roth IRAs, educational and traditional accounts for our members. Contact us today to find out why a credit union IRA is the best investment option for you!