IRA Investments

• Anyone can open an IRA account with a financial institution, such as a bank, a brokerage or a mutual fund company, which will host the account and act as the custodian of the IRA assets. Account holders may choose to invest in mutual funds, ETFs, individual stocks and bonds as offered by the hosting financial institution. Gains and other investment income accrued to IRAs are tax free if kept within IRA accounts. Investing in ETFs is an alternative to both mutual funds and individual investments, and can be uniquely beneficial to IRAs because of the special structures of ETFs.
  
  

Fee Factor

• Investments involve fees and management expenses, especially in the case of mutual fund investments. Given that IRAs are long-term investment plans for retirement, money spent on fees reduces the compounding effect on investment results over the long run. Compared with mutual funds, ETFs have low fees. ETFs usually track certain predefined sectors of the stock market or bond market and thus require no active trading by ETF managers, allowing them to charge lower management fees. For IRA account holders who prefer to follow certain areas of a market, putting some ETFs into their IRAs can potentially improve investment results from fee savings in the long run.
  
  

Tax Consideration

• Putting ETFs into IRAs may help take advantage of the tax benefits afforded under IRA rules. As a tax-deferred investment plan for retirement, IRAs provide tax shelters for trading gains and income as long as the money remains in an IRA account. For IRA account holders who are active traders, investing in mutual funds versus ETFs provides different degrees of tax benefit. Mutual funds are not designed for short-term trading partly because mutual fund companies quote their fund value only once a day. On the other hand, ETFs can be actively traded like stocks with similar price volatility. Gains from ETF trading are not taxed and can contribute to the compounding effect on long-term investment results.
  
  

Cash Distribution

• Investing in ETFs avoids certain cash distribution by the funds, primarily because of the passive investment nature of ETFs. ETFs don’t constantly buy and sell for their portfolio holdings and thus distribute no capital gains as cash to ETF shareholders. You may not want cash distributions for investment accumulation. Idle cash generates no investment returns and may have to be reinvested, which often is a potential issue for mutual fund investments. Unlike ETFs, mutual funds sell some of their holdings from time to time, either to satisfy fund shareholder redemption or to follow their active trading strategy. Thus, IRA account holders of mutual funds must periodically reinvest their cash distribution by purchasing additional mutual fund shares to alleviate any negative effect of holding cash on investment growth.