You can invest in a wide variety of assets in a Roth Individual Retirement Account (IRA), including exchange-traded funds (ETFs). When your Roth IRA is in the hands of an online broker or a traditional stockbroker, it can make it easier to purchase ETFs. Remember that ETFs with dividend-paying stocks ultimately distribute them to shareholders usually once a year, although dividend-focused ETFs may do so more frequently. ETFs that hold interest-paying bonds will also distribute that interest to shareholders on a monthly basis, in many cases.
The IRS taxes dividends and interest on ETFs in the same way as income from underlying stocks or bonds, and the income is reported on your 1099 statement. For most people, investing for retirement means creating a portfolio of index funds or exchange-traded funds (ETFs). Choose the right funds and you'll get excellent diversification and ultra-low costs. The best exchange-traded funds (ETFs) for your Roth IRA will include funds designed for long-term investments.
$94 billion is invested in self-managed IRAs, in which many people choose to exercise the freedom of this retirement account and invest their money in stocks and bonds themselves instead of using mutual funds. Even if a company can use a general account to keep records, the total costs with mutual funds are likely to be at least comparable, if not lower, to those of ETFs. For example, ETFs backed by the physical metal itself (unlike futures contracts or the shares of mining companies) are structured as granting trusts. The IRS treats investing in a precious metals ETF in the same way as investing in the metal itself, which for tax purposes would be considered an investment in collectibles.
If you want to buy funds that generate income, such as dividend ETFs or bond ETFs, an IRA is an ideal account for holding these funds. Both may have a place in your portfolio, but because of the ease of buying and selling and possibly the more favorable tax treatment, many IRA investors are finding that ETFs are better suited to their goals and objectives than mutual funds. Dividends can be taxed as ordinary income in a taxable brokerage account, so it's best to keep them in an IRA. The best funds to invest in an IRA or 401 (k) are long-term investments, such as stock mutual funds and ETFs.
Investors who use ETFs to expose themselves to precious metals, such as silver and gold, may face a different set of tax problems. ETFs that invest in commodities other than precious metals, such as oil, corn or aluminum, do so through futures contracts, mainly because keeping the physical object in a vault is impractical.