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9 Mutual Funds Perfect to Grow Your IRA

Whether you're an experienced investor or a novice, mutual funds can be effective building blocks for your IRA portfolio. But it's also true that finding the right mutual funds can be a chore. You have to parse through many options, and all those five-letter symbols can start to make your head spin.

Streamline that process by first taking a moment to define what you need from the funds in your IRA. Do you want a minimum-effort portfolio? Market-level growth over the long term? Or aggressive growth to build momentum as fast as possible? If any of those fit, you're in the right place. Here's a look at three fund types that match those goals, along with nine mutual funds that could play a role in growing your IRA.

Notepad with mutual funds written on it, along with highlighter.

Image source: Getty Images.

For the busy saver: Target-date funds

Target-date funds, or TDFs, are appropriate if you want a single, easy-to-manage fund that's diversified across asset classes. These funds follow a prescribed mix of stocks, bonds, and cash that gradually gets more conservative over time. In practice, that means you don't have to rebalance or adjust your holdings to limit risk as you near retirement.

When evaluating TDFs, be sure to review the fund's "glide path." The glide path defines how the fund's portfolio will change over time relative to the target year. Some TDFs don't reach their most conservative portfolios until well beyond the target year. These can offer more growth potential, but also more volatility. Other TDFs will reach their most conservative point either at or before the target year.

The table below shows three different fund families with three different glide paths.


Expense Ratio

Total Assets

Target Year

When the Fund Reaches Most Conservative Point

JPMorgan Smart Retirement Blend Income Fund


$670 million

Aligns with your retirement 

In the target year

Fidelity Simplicity RMD Income Fund


$42 million

Aligns with your 70th birthday 

10 years after the target year 

John Hancock Multimanager Lifetime Portfolio


$723 million

Aligns with your retirement

20 years after the target year 

Table data source: JPMorgan, Fidelity, John Hancock.

As you can see, the JPMorgan fund's target year should align with the year you plan to retire. That's also the year this fund stops derisking its portfolio. At that point, the holdings will consist of 5% cash, 62.5% bonds, and 32.5% equity.

The Fidelity fund is a slightly different animal, because it's supposed to align with your 70th birthday. The portfolio does continue to evolve for another 10 years after that target year. At its most conservative, the fund holds 19% equity, 69% fixed income, 10% inflation-protected debt, and 3% long-term U.S. Treasury debt.

The John Hancock fund will hold 48% fixed income and 52% equities at retirement. The equity percentage gradually declines for another 20 years until the portfolio reaches a mix of 75% fixed income and 25% equity.

For the young saver: Equity index funds

If you have decades until retirement and you want market-level growth, consider equity index funds. S&P 500 index funds are a good starting point. These mutual funds invest in the S&P 500 companies to mimic the index's performance. The S&P 500's long-term average annual growth after inflation is about 7%. That's certainly enough to show some nice momentum in your IRA over time.

When evaluating index funds, pay close attention to the fees. All S&P 500 index funds basically have the same portfolios, so the ones with the lowest fees are best positioned for the highest returns. We're talking fractions here, but every penny counts.

The table below shows three low-cost S&P 500 index funds. Fidelity's 500 Index Fund is the cheapest and also edges out the other two in terms of performance.


Expense Ratio

Total Assets

5-year Annualized Return

10-year Annualized Return

State Street S&P 500 Index Fund (NASDAQMUTFUND:SVSPX)


$1.5 billion



Schwab S&P 500 Index Fund(NASDAQMUTFUND:SWPPX)


$50 billion



Fidelity 500 Index Fund(NASDAQMUTFUND:FXAIX)


$274 billion



Table data source: Morningstar.

For the risk-tolerant saver: Growth funds

Growth funds invest in companies that are expected to increase their revenue and earnings faster than their peers or faster than the overall market. If those expectations pan out, the growth fund will outperform the index fund. But there's a risk of things going the other way, too.

The market has been trending up since 2009, so recent history has been good to growth funds. You can see that the three funds highlighted in the table below have achieved 10-year annualized returns in excess of 17%.


Expense Ratio

Total Assets

5-year Annualized Return

10-year Annualized Return

Vanguard U.S. Growth Fund Investor(NASDAQMUTFUND:VWUSX)


$43 billion



Fidelity Growth Discovery Fund(NASDAQMUTFUND:FDGRX)


$62 billion



T. Rowe Price Blue Chip Growth(NASDAQMUTFUND:TRBCX)


$93 billion



Table data source: Morningstar.

Investors love growth companies in good times, but tend to move into more reliable options in bear markets. Should the market climate become more uncertain, growth funds will falter. That's a trade-off you have to accept for the higher growth potential. You should also be at least 10 years away from retirement, so you have the time to ride out any downturns.

Choose funds that match your style and risk tolerance

Mutual funds provide broad diversification for your IRA portfolio. The challenge lies in choosing funds that match your goals and investing style. Of course you want growth over time -- we all do -- but also consider how much hands-on work you're ready for and how much risk you can tolerate. Invest with those factors in mind and you're more likely to be successful over the long term.


Best mutual funds in October 2021

Mutual funds are one of the most popular ways to invest in the stock and bond markets, especially as part of employer-sponsored 401(k) plans and self-directed IRAs. Mutual funds allow you to buy a diversified collection of assets in just one fund, often at low cost. So you’ll be able to create a diversified portfolio quickly, easily and cheaply.

But with literally thousands of available funds, how do you find the top ones for your portfolio? Below Bankrate has highlighted some of the best mutual funds based on Morningstar research.

Top performing low-fee mutual funds

Bankrate selected its top funds based on the following criteria, and included only funds that were investible for regular investors (i.e., not those with $5 million minimum investments):

  • Five-star U.S. stock funds according to Morningstar, for quality
  • No sales load (i.e., commission), in order to reduce costs
  • 5-year performance better than the Standard & Poor’s 500, which has historically returned about 10 percent annually on average
  • An expense ratio less than 0.5 percent, to minimize ongoing costs
  • Funds where the manager has been at the helm for more than five years, to ensure stability
  • Then we sorted the results by the top performers year to date

Below are some of the best mutual funds, with performance data as of Sept. 28, 2021.

Vanguard Small Cap Value Index (VISVX)

This fund tracks an index representing value stocks of small U.S. companies.

  • Performance YTD: 22.3 percent
  • Historical performance (annual over 5 years): 11.2 percent
  • Expense ratio: 0.19 percent

Schwab Fundamental US Large Company Index Fund (SFLNX)

This fund invests in large publicly traded companies and tracks the total return of the Russell RAFI US Large Company Index

  • Performance YTD: 22.2 percent
  • Historical performance (annual over 5 years): 14.6 percent
  • Expense ratio: 0.25 percent

Vanguard Windsor II Investor Shares (VWNFX)

This fund invests in large publicly traded companies that are value priced.

  • Performance YTD: 20.4 percent
  • Historical performance (annual over 5 years): 14.9 percent
  • Expense ratio: 0.34 percent

Fidelity Growth and Income (FGIKX)

This fund invests primarily in stocks that pay dividends and have the potential to rise in the future. It invests in both domestic and foreign stocks as well as growth and value stocks.

  • Performance YTD: 18.4 percent
  • Historical performance (annual over 5 years): 13.8 percent
  • Expense ratio: 0.49 percent

Fidelity 500 Index Fund (FXAIX)

This fund invests in large publicly traded companies and may look much like an S&P 500 index fund.

  • Performance YTD: 17.1 percent
  • Historical performance (annual over 5 years): 17.1 percent
  • Expense ratio: 0.015 percent

Best mutual funds for the long term

Using the same criteria as before, Bankrate sifted through funds that had great ten-year track records. Below are some of the best mutual funds, with performance data as of Sept. 28, 2021.

Shelton NASDAQ-100 Index Direct (NASDX)

This fund tries to replicate the performance of the Nasdaq-100 index.

  • Performance YTD: 15.2 percent
  • Historical performance (annual over 5 years): 25.1 percent
  • Historical performance (annual over 10 years): 21.7 percent
  • Expense ratio: 0.50 percent

Fidelity NASDAQ Composite Index (FNCMX)

This index fund tracks the performance of the entire Nasdaq stock exchange, which includes over 3,000 stocks.

  • Performance YTD: 13.3 percent
  • Historical performance (annual over 5 years): 23.2 percent
  • Historical performance (annual over 10 years): 20.4 percent
  • Expense ratio: 0.29 percent

Voya Russell Large Cap Growth Index Fund (IRLNX)

This index fund tracks the performance of the Russell Top 200 Growth index, which includes large stocks.

  • Performance YTD: 16.0 percent
  • Historical performance (annual over 5 years): 23.4 percent
  • Historical performance (annual over 10 years): 19.6 percent
  • Expense ratio: 0.43 percent

Hartford Core Equity R5 (HGITX)

This fund invests primarily in large publicly traded companies that are growth-focused and value-priced.

  • Performance YTD: 14.2 percent
  • Historical performance (annual over 5 years): 17.2 percent
  • Historical performance (annual over 10 years): 17.1 percent
  • Expense ratio: 0.47 percent

Voya Russell Large Cap Index Portfolio (IIRLX)

The fund targets returns that correspond to the total return of the Russell Top 200 Index.

  • Performance YTD: 15.9 percent
  • Historical performance (annual over 5 years): 17.9 percent
  • Historical performance (annual over 10 years): 16.8 percent
  • Expense ratio: 0.36 percent

How to give your investments a boost through mutual funds

One of the main benefits of owning mutual funds is the diversification they’re able to offer for relatively low investment amounts and fees. For just an investment of a few thousand dollars, mutual funds can give you a stake in hundreds of companies across different industries, allowing you to build a diversified portfolio.

Ultimately, you’ll make money in mutual funds if the underlying securities in those funds perform well. For stock mutual funds, you’ll need the stocks held in the fund to appreciate in value in order to benefit as a fund investor. You’ll also benefit when those companies pay dividends.

How to pick the best mutual funds for your portfolio

Choosing the best mutual fund for you depends a lot on what you need, in particular your risk tolerance and time horizon. But it also depends on what else you already have in your portfolio. Here are a few key questions to consider in finding the best mutual fund for you:

  • When do you plan to access the money? The longer your time horizon, the more risk you can take, meaning stock funds could be the more appropriate investment. If you need the money in the next year or two, you may want to reduce your risk with bond or money market funds.
  • Can you withstand temporary losses and hold on? If you can stick with your investing plan for the long term, stock funds will likely be a better investment for you.
  • Do you have a specific gap in your portfolio? You may need greater balance in your portfolio. Are you heavily allocated toward bond funds and need some stocks to balance out your returns, or vice versa? Are you invested only in U.S.-based investments and not foreign stocks?

It’s important to know your portfolio and financial situation so that you can assess what mutual fund may be best for you. But even when you find a fund type that you like, you’ll also want to assess which funds are better along a few dimensions.

Ask yourself the following questions:

  • What is the fund’s longer-term track record? A higher-performing long-term record (over five or 10 years) is better than a lower one. The fund’s long-term record is your best gauge to how well it may perform in the future.
  • Has the fund done well only in the last year or two? A fund that has outperformed only recently may eventually revert to its long-term record. Investors often chase hot performance, then end up buying high and almost inevitably selling low.
  • What does the fund charge for investing? Is there a sales load? It’s easy to avoid a sales load, but virtually all mutual funds charge an expense ratio to cover the ongoing costs of the fund and generate a profit.

Some funds (such as index funds) invest in literally the same stocks or bonds as other similar funds. So you can find the same “product” for a lower expense ratio by searching around. For example, any fund based on the Standard & Poor’s 500 index will have substantially the same holdings as another, so the real basis for comparison is the fund’s fees. As the old investor saying goes, “Fees are certain but returns are not.”

Certain investors prefer exchange-traded funds over mutual funds – here’s what to consider.

Types of mutual funds

Mutual funds come in a variety of types and are categorized by the type of investments they own – stock funds, bond funds, money market funds, balanced funds and target date funds.

Stock mutual funds

Stock mutual funds own stocks exclusively, giving them the potential for greater volatility – both higher overall returns and lower overall returns than other types of mutual funds. Included among stock mutual funds are some of the most popular index funds, where the fund is based on the Standard & Poor’s 500 index of top U.S.-based companies. From here they may be further divided into funds focused on growth stocks, value stocks or some combination of the two.

Bond mutual funds

Bond mutual funds own bonds exclusively, making them generally less volatile than stock funds. But they’re also likely to deliver lower returns over time than their stock-based counterparts.

Money market mutual funds

These mutual funds own safe securities such as cash and very short-term debt, making them generally safer than either stock- or bond-based mutual funds but also lower-return. That said, unlike FDIC-backed money market accounts at a bank, money market mutual funds can lose principal, meaning it’s possible, though not likely, that you won’t get your whole investment back.

Balanced mutual funds

These mutual funds can invest in stocks, bonds and money market instruments, and generally can offer lower volatility in exchange for lower overall returns. How much is allocated to each type of asset class depends on the fund’s investment manager and its expectations for return.

Target-date mutual funds

Target-date mutual funds are popular in 401(k) accounts, and they typically invest in stocks, bonds and money market instruments. Investors pick when they want to access their money (say, at retirement) and then the target date fund selects investments that are appropriate for that time period, reducing risk as the investor nears the target date. Usually this means the fund shifts investments from higher-risk (but high-return) stocks to lower-risk bonds over time.

Alternatives to mutual funds

  • ETFs: Exchange traded funds, or ETFs, are very similar to mutual funds, but trade more like stocks. You’ll still be purchasing a fund that holds a basket of securities, allowing you to diversify, but you’ll be able to buy that fund throughout the trading day. Mutual funds can only be bought and sold at their net asset value (NAV), which is calculated at the end of the day. ETFs are also able to be purchased with smaller investments than mutual funds, which typically require a minimum investment of a few thousand dollars.
  • Individual stocks: You could also purchase a basket of individual stocks on your own, but this might require a sizable investment beyond what’s needed to invest in mutual funds. You may be able to build a portfolio using fractional shares, but it could be difficult to match the breadth of the portfolios offered by mutual funds without a meaningful investment. In addition, you’ll need to research each company you’re buying and understand their financial and competitive positioning in order to be successful investing. If you are able to build a portfolio of individual stocks, you’ll also need to monitor it and make sure positions don’t grow or shrink to levels you aren’t comfortable with.
  • High-yield savings account: If you’re looking for an alternative to money market mutual funds, a high-yield savings account is likely to be a good option. You’ll typically receive interest beyond what’s available in a traditional checking or savings account and as long as your account is with an FDIC-insured institution, your money will be safe up to $250,000 per depositor, per bank.

Learn more:

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

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These are the best IRAs for all types of investors, from beginners to the more experienced

Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.

Many people use individual retirement accounts — more commonly known as IRAs — to save up money for their nonworking years.

Investing in an IRA is an effective way to make sure you're setting aside a retirement nest egg, especially if you don't already have a 401(k) plan offered by your employer.

IRAs also offer tax benefits, and they are set up to encourage you to leave your funds untouched by imposing early withdrawal penalty fees should you tap into your earnings before age 59 and a half.

To determine which IRAs are the best overall, Select reviewed and compared over 20 different accounts offered by national banks, investment firms, online brokers and robo-advisors. While there are several types of IRAs on the market, such as traditional IRAs, Roth IRAs, SEP IRAs and SIMPLE IRAs, we chose to focus on only traditional IRAs for the purpose of this ranking.

To identify our top IRAs, we narrowed down the choices by selecting only those that require no minimum deposit, offer commission-free trading of stocks and ETFs, provide a variety of investment options and have educational resources or tools to help all sorts of investors.

We ranked the best IRAs by what type of investor you are, from beginner to experienced, as well as hands-on and hands-off investors. We included a best overall pick as well.

Below, Select's picks top five IRAs. (See our methodology for more information on how we choose the best traditional IRAs.)

Best individual retirement accounts


Best overall

Charles Schwab

Information about Charles Schwab has been collected independently by Select and has not been reviewed or provided by Charles Schwab prior to publication.
  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One® Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit

  • Fees

    Fees may vary depending on the investment vehicle selected. Schwab One® Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract

  • Bonus


  • Investment vehicles

    Robo-advisor:Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™IRA:Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA)Brokerage and trading: Schwab One® Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™ and Schwab Organization Account

  • Investment options

    Stocks, bonds, mutual funds, CDs and ETFs

  • Educational resources

    Extensive retirement planning tools

See our methodology, terms apply.


  • $0 minimum deposit for active investing
  • No commission fees for stock and ETF trades and no transaction fees for over 4,000 mutual funds
  • Offers extensive retirement planning tools
  • Users can get on-demand advice from a professional advisor/Schwab expert
  • Robo-advisor Schwab Intelligent Portfolios® available as a no-fee automated service option (with Premium version available for a fee)
  • Trading platform StreetSmart Edge® available for more active investors
  • 24/7 customer support access by phone or chat
  • Charles Schwab offers over 300 brick-and-mortar branches across the U.S. for in-person support


  • Specific transactions may require commission fee
  • Robo-advisor Schwab Intelligent Portfolios Premium charges a one-time planning fee of $300, then a $30 per month advisory fee. For that price, you get unlimited 1:1 guidance from a CFP, interactive planning tools, plus a personalized roadmap for reaching your goals

Best for beginner investors

Fidelity Investments IRA

Information about Fidelity Investments IRA has been collected independently by Select and has not been reviewed or provided by Fidelity Investments prior to publication.
  • Minimum deposit


  • Fees

    $0 commission fees for stock and ETF trades; $0 transaction fees for over 3,400 mutual funds; $0.65 per options contract

  • Bonus

    500 free trades

  • Investment options

    Stocks, bonds, mutual funds, CDs and ETFs

  • Educational resources

    Tools and calculators that show users their retirement goal progress; Fidelity Five Money Musts online game to teach you about managing money in the real world

See our methodology, terms apply.


  • $0 minimum deposit
  • No commission fees for stock and ETF trades and no transaction fees for over 3,400 mutual funds
  • Abundant educational tools and resources
  • Offers robo-advisor Fidelity Go (free for balances under $10,000)
  • 24/7 customer service
  • Offers over 100 brick-and-mortar branches across the U.S. for face-to-face support


  • 0.50% annual fee to speak to a human advisor for accounts under $2 million
  • Some of Fidelity's mutual funds require reaching specific thresholds, i.e. $10,000 (an increase from the previous $1,000 per trade monitoring threshold)
  • Reports of platform outages during heavy trading days
  • Robo-advisor fee is $3 per month for balances between $10,000 and $49,999; 0.35% for balances over $50,000

Best for experienced investors

Vanguard IRA

Information about Vanguard IRA has been collected independently by Select and has not been reviewed or provided by Vanguard prior to publication.
  • Minimum deposit

    $0, but you'll need $1,000 to invest in many of its retirement funds

  • Fees

    $20 annual account service fee unless you sign up for electronic statements or meet minimum balance requirements; $0 commission fees for stock and ETF trades; $0 transaction fees for over 3,000 mutual funds

  • Bonus


  • Investment options

    Stocks, bonds, mutual funds, CDs, ETFs and options

  • Educational resources

    Retirement planning tools

See our methodology, terms apply.


  • $0 minimum deposit
  • No commission fees for stock and ETF trades and no transaction fees for over 3,000 mutual funds
  • Large mutual fund selection
  • Offers retirement planning tools
  • Customers get access to GetHuman, a website dedicated to human-to-human customer service, with features that include talking to a Vanguard rep, notice of the current hold time, reminders to call when call center opens, as well as pro tips and talking points for customers


  • $20 annual account service fee (unless you sign up for electronic statements or meet minimum balance requirements)
  • Many retirement funds require $1,000 to invest
  • Trading platform is not as robust as others

Best for hands-off investors


  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For Betterment Digital Investing, $0 minimum balance; Premium Investing requires a $100,000 minimum balance

  • Fees

    Fees may vary depending on the investment vehicle selected. For Betterment Digital Investing, 0.25% of your fund balance as an annual account fee; Premium Investing has a 0.40% annual fee

  • Bonus

    Up to one year of free management service with a qualifying deposit within 45 days of signup. Valid only for new individual investment accounts with Betterment LLC

  • Investment vehicles

    Robo-advisor:Betterment Digital InvestingIRA:Betterment Traditional, Roth and SEP IRAs401(k):Betterment 401(k) for employers

  • Investment options

    Stocks, bonds, ETFs and cash

  • Educational resources

    Betterment RetireGuide™ helps users plan for retirement

See our methodology, terms apply.


  • $0 minimum deposit
  • No trade or transfer fees
  • Good for automated investing
  • Customizes users' portfolios around their financial goals, timeline and risk tolerance
  • Users can assign specific investing goals (short- and long-term) to each portfolio and invest using different strategies (less and more risk)
  • Quick and easy to set up account
  • Able to sync external retirement accounts to your Betterment retirement goal so all your accounts are in one place
  • Premium plan users get unlimited access to a financial advisor (otherwise, one-time advisor consultations cost a fee ranging from $199 to $299)
  • Advanced features include automatic rebalancing, tax-saving strategies and socially responsible investing
  • Betterment RetireGuide™ helps users plan for retirement


  • 0.25% annual account fee
  • 0.40% annual account fee for upgraded premium plan
  • Premium plan requires $100,000 minimum balance

Best for hands-on investors


Information about E*TRADE IRA has been collected independently by Select and has not been reviewed or provided by E*TRADE prior to publication.
  • Minimum deposit


  • Fees

    No account fees; $0 commission fees for stock and ETF trades; $0 transaction fees for over 4,000 mutual funds

  • Bonus

    For a limited time only: Get up to $3,000 when you open and fund within 60 days of account opening a new E*TRADE brokerage or retirement account by June 30, 2021, using promo code: BONUS21 (deposit minimums start at $10,000)

  • Investment options

    Stocks, bonds, mutual funds, CDs, ETFs and options

  • Educational resources

    Educational library includes in-depth articles and videos

See our methodology, terms apply.


  • $0 minimum deposit
  • No commission fees for stock and ETF trades and no transaction fees for over 4,000 mutual funds
  • Offers automated investing through Core Portfolios platform (minimum $500 to open account)
  • Active traders receive volume discounts on options
  • Strong mobile platform


  • Website is not as user-friendly as others
  • Robo-advisor option Core Portfolios costs minimum $500 to open account


What is an IRA?

IRAs are tax-advantaged investment accounts. They offer a range of investments for your money, such as individual stocks, bonds, mutual funds, CDs and cash.

You can open an IRA at most banks and credit unions, as well as through online brokers and investment companies.

If you already make automatic contributions into a 401(k) account through your employer, you may wonder if you also need an IRA. IRAs supplement these other retirement accounts and come with their own advantages. They are accessible and easy to set up, plus individuals can shop around for the right investments for their finances versus being limited to their employer's 401(k) plan. This gives you the flexibility to make your own investment selections, with the guidance of the brokerage firm or bank that manages your account.

You can also set up automatic contributions into your IRA from your checking or savings account. IRAs typically don't come with account setup fees, but you'll likely have to pay transaction and advisory fees when applicable, as well as fund expense ratio fees which cover operational costs.

Before funding an IRA, you need to understand the contribution limits and tax implications. How much you can contribute and deduct from your taxes depends on your age, income, tax filing status and whether or not you have a retirement plan through your employer.

Below are two handy resources from the IRS website that help guide you through how much you can contribute to an IRA and how much of it can be tax-deductible:

  1. IRA Contribution Limits: There is a maximum dollar amount you can contribute to your IRA each year, and it's determined by the federal government. In 2021, the limit is $6,000 if you're younger than 50 and $7,000 for those 50 and older.
  2. IRA Deduction Limits: There are also limits on how much of your IRA contribution you can deduct from your individual federal income tax return. This only applies to traditional IRAs as Roth IRA contributions are not tax-deductible. You cannot make a deduction if you (or your spouse, if married) have a retirement plan at work and your income is $76,000 or more as a single filer/head of household, $125,000 or more as married filing jointly/qualifying widow(er) or $10,000 or more as married filing separately. If you (and your spouse, if married) do not have a retirement plan at work, you can make a full deduction up to the amount of your contribution limit.

How do I choose an IRA?

Though there are several different types of IRAs, you may not be eligible for all of them. Individual taxpayers can choose from traditional and Roth IRAs, while anyone who is self-employed (think freelancers) or a small business owner can choose from SEP (Simplified Employee Pension) and SIMPLE (Savings Incentive Match Plan for Employees) IRAs.

When choosing an IRA to start saving for retirement, you'll most likely be deciding between a traditional or Roth IRA. Key factors to think about are your financial goals, timeline to retirement and risk tolerance. If you're closer to retirement, you'll probably want to go with investments that are lower risk and have less potential to lose money as you near your nonworking years. The advantage of choosing an IRA from a well-known brokerage firm or bank is that they help you assess what would be the best investments depending on your other goals, how soon you want to retire and how conservative you want to be.

For the more active investors, look at IRAs offered by online brokers like E*TRADE. For the more passive investors, consider an IRA from a robo-advisor, such as those from Betterment. Robo-advisors rely on algorithms to manage your portfolio for you, taking into consideration your risk tolerance and goals.

For a more personal experience, consider IRAs offered by big brokerage firms like Charles Schwab, Fidelity Investments and Vanguard that provide access to human advisors.

Traditional vs Roth IRA?

The big difference between traditional and Roth IRAs is when you pay taxes.

With a traditional IRA, you contribute pre-tax dollars. While this is better for your immediate cash flow as you're taking out less from your disposable income now, your money grows tax-deferred and later in retirement you will have to pay income tax on any funds you choose to withdraw. This is a good option if you think you will be in the same or a lower tax bracket (have the same or less income) when you retire. If you withdraw either your pre-tax contributions or earnings from your traditional IRA before age 59 and a half, you'll be taxed in addition to incurring a 10% early withdrawal penalty fee.

With a Roth IRA, you pay taxes upfront by contributing after-tax dollars. While this is a bigger hit to your immediate cash flow since you are taking out more from your disposable income now, your money grows tax-free and so in retirement, withdrawals are generally not taxed as long as your account has been open for at least five years. This is a good option if you think you will be in a higher tax bracket (have more income) when you retire.

You can withdraw your after-tax contributions from your Roth IRA at any age tax- and penalty-free. If you withdraw any earnings you've made on your investments before age 59 and a half, you will incur a 10% early withdrawal penalty (though it won't be taxed like a traditional IRA). Some exceptions to this early withdrawal penalty on Roth IRAs include first-time home purchases, college expenses and birth or adoption expenses.

You can use calculators like this one from Charles Schwab to help you decide between choosing a traditional or Roth IRA.

How much should I contribute to my IRA?

There are strict contribution limits, so you can only deposit a certain amount of money into your IRA each year.

Both traditional and Roth IRAs have the same contribution limits: For 2021, those under age 50 can make a total contribution into their traditional and Roth IRAs of up to $6,000. Those 50 or older have a limit of $7,000.

With traditional IRAs, you can contribute regardless of how much money you earn, but with Roth IRAs there are income limits. High-earners may not be eligible to open or contribute to a Roth IRA. Here are the 2021 income thresholds for contributing to a Roth IRA:

  • Married filing jointly or qualifying widow(er): Not eligible if your modified adjusted gross income is $208,000 or more
  • Single, head of household or married filing separately (and you didn't live with your spouse at any time during the year): Not eligible if your modified adjusted gross income is $140,000 or more
  • Married filing separately (if you lived with your spouse at any time during the year): Not eligible if your modified adjusted gross income is $10,000 or more

Can I lose money in an IRA?

In short, yes. Retirement accounts like IRAs invest your money in stocks and bonds, so your money fluctuates with the highs and lows of the market. You can also lose money if you take out cash before retirement and pay early-withdrawal penalties.

The good news is that retirement funds are long-term investments so market dips in the short term shouldn't affect you too much in the long haul. And while early-withdrawal penalties seem like punishment, they are there to encourage you not to withdraw from these accounts.

Our methodology

To determine which individual retirement accounts (IRAs) are the best for investors, Select analyzed and compared traditional IRAs offered by national banks, investment firms, online brokers and robo-advisors. We narrowed down our ranking by only considering those that offer commission-free trading of stocks and ETFs, as well as a variety of investment options so you can best maximize your retirement savings.

We also compared each IRA on the following features:

  • $0 minimum deposit: All of the IRA on our ranking don't have minimum deposit requirements.
  • Low fees: We considered each IRA's fees, commission trading fees and transaction fees.
  • Bonus offered: Some IRA offer promotions for new account users.
  • Variety of investment options: The more diversified your portfolio, the better. We made sure our top picks offer investments in stocks, bonds, mutual finds, CDs and ETFs. Most also offer options trading.
  • A hub of educational resources: We opted for IRA with an online resource hub or advice center to help you educate yourself about retirement accounts and investing.
  • Ease-of-use: Whether accessing your IRA via your laptop at home or on your smartphone while on the go, it's important to have an easy user experience. We noted when investment platform excelled in usability.
  • Customer support: Every IRA on our list provides customer service available via telephone, email or secure online messaging.

After reviewing the above features, we sorted our recommendations by what type of investor is a best fit, from beginners and hands-off investors, to the more experienced and hands-on investors.

Your earnings in an IRA depend on any associated fees, the contributions you make to your account and the fluctuations of the market.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

The Best Roth IRA Investments

The best Roth IRA investments are the ones that can take advantage of the way the retirement vehicles are taxed. There are no upfront deductions on contributions, but your investments grow tax-free inside the account. And withdrawals in retirement? They're tax-free, too—even on the earnings.

To take full advantage of the Roth IRA's tax-sheltering properties, it's best to hold investments that would otherwise trigger substantial taxes. Investments with high growth potential, big dividends, or high levels of turnover are prime candidates.

Key Takeaways

  • Some investments take better advantage of a Roth IRA's unique characteristics.
  • Overall, the best investments for Roth IRAs are those that generate highly taxable income, be it dividends or interest, or short-term capital gains.
  • Investments that offer significant long-term appreciation, like growth stocks, are also ideal for Roth IRAs.
  • The Roth's tax sheltering characteristics are useful for real estate investments, but you'll need a self-directed Roth IRA for that.
  • Tax-exempt assets and low-risk cash equivalents are wasted in a Roth IRA.

Roth IRA Investment Options

A Roth IRA can hold any financial asset that a traditional IRA holds. In fact, aside from life insurance and collectibles, Roth IRAs can hold just about any financial asset, period. However, when it comes to investing in Roth IRAs, not all assets are created equal.

Although they share the same tax-advantaged structure, Roth IRAs differ from the traditional variety in several important ways. The biggest difference: Roth IRA contributions are made with after-tax, not pre-tax, dollars. So you won't get an income tax deduction the year you make them. But you do get tax-free withdrawals in retirement.

Also, unlike traditional IRAs, you aren't obligated to take distributions at a certain age from a Roth IRA. With no required minimum distributions (RMDs), your account keeps growing if you don't need the money. And when the time comes, you can pass it on to your beneficiaries.

The unique characteristics of the Roth IRA mean that some investments suit it better than others. Below is a breakdown of the most common types of assets—and which types are the best to hold.

$810 billion

The size of assets held in Roth IRAs in 2017, out of $9.2 trillion in IRA accounts total.

Source: Investment Company Institute.

The Best Mutual Funds for Roth IRAs

Mutual funds offer simplicity, diversification, low expenses (in many cases), and professional management. They are the darlings of retirement investment accounts in general, and of Roth IRAs in particular. An estimated 18% of Roth IRAs are held at mutual fund companies.

When opting for mutual funds, the key is to go with actively managed funds, as opposed to those that just track an index (or passively managed funds). The rationale: Because these funds make frequent trades, they are apt to generate short-term capital gains.

These are taxed at a higher rate than long-term capital gains. Keeping them in a Roth IRA effectively shelters them, since earnings grow tax-free.

The Best Stocks for Roth IRAs

Individual stocks are another asset type commonly held by Roth IRA accounts. In fact, Roth IRA investors are more exposed to equities than their traditional IRA counterparts. Of course, the equity universe is huge. But the types of equities (and equity mutual funds) best-suited to a Roth fall into two basic categories: income-oriented stocks and growth stocks.

Income-Oriented Stocks

One is income-oriented stocks—common shares that pay high dividends, or preferred shares that pay a rich amount regularly. Typically, when you hold stocks in a non-retirement account, you pay taxes on any dividends you earn. Depending on whether they're qualified or nonqualified, the rate could be as high as your regular income rate.

But, as with the actively managed mutual funds mentioned above, holding these within a Roth shields them from that annual tax bite. In fact, as long as you obey the Roth withdrawal rules, you won’t ever pay tax on those dividends or any other earnings.

Growth Stocks

Growth stocks are small-cap and mid-cap companies that seem ripe for appreciation down the road. Normally, their serious growth would trigger a tax bite, albeit at lower long-term capital gains rates (usually 15%).

But it won't matter that these stocks are worth substantially more when you cash them in after retirement. If held in a Roth, you won't owe any taxes on them at all.

Remember, the whole strategy of the Roth IRA revolves around the assumption that your tax bracket will be higher later in life. Also, growth stocks can be volatile, so keeping them in a long-term retirement account that can withstand the ups and downs of the stock market over the long haul mitigates the risk.

Investors who trade equities frequently should also consider doing so from their Roth IRA. Doing so can shield any short-term profits and capital gains from taxes.

The Best Bonds for Roth IRAs

When they think of income-oriented assets, many investors think bonds. Interest-paying debt instruments have long been the go-to for an income-oriented stream. About 7% of Roth IRA balances are allocated to bonds and bond funds.

Corporate bonds and other high-yield debt are ideal for a Roth IRA. It's the same principle as with the high-dividend equities—shield the income—only more so. You can't invest interest payments back into a bond in the way you can reinvest a dividend back into shares of stock (a strategy to avoid taxes in regular accounts). The Roth's tax protection is thus even more valuable here when receiving cash flows from interest or dividends that would normally be subject to taxation in non-Roth accounts.

The Best ETFs for Roth IRAs

What about exchange traded funds (ETFs), that rapidly ascending rival to mutual funds? Certainly, these pooled asset baskets that trade like individual stocks can be sound investments. They offer diversification and good yields at much lower expense ratios than mutual funds.

The only caveat is that, because most are designed to track a particular market index, ETFs tend to be passively managed (that's how they keep the costs low). As a result, they invest infrequently, so you don't really need the Roth's tax-sheltering shell as much.

Still, it wouldn't hurt to have them in your account. Low annual fees and expenses—we're talking 0.25% to 0.5%—is not the worst idea in the world, when it comes to your rate of return.

Many ETFs are index funds, which aim to match the performance of a benchmark collection of securities, like the S&P 500. There are indexes—and index funds—for nearly every market, asset class, and investment strategy.

As with investing in individual stocks, the ETFs to look for would be those that invest in high-growth or high-income equities.

The Best Real Estate for Roth IRAs

Individuals have two ways to invest in real estate:

  • Indirectly, by owning securities that own property
  • Directly, by owning property themselves

Indirect Real Estate Investments

Real estate investment trusts (REITs), publicly-traded portfolios of properties, are big income-producers, though they also offer capital appreciation. REITs invest in most kinds of real estate, including:

  • Apartment buildings
  • Cell towers
  • Hotels
  • Infrastructure
  • Medical facilities
  • Office buildings/office parks
  • Shopping centers and malls
  • Warehouses

While most REITs focus on one type of property, some hold a variety in their portfolios.

REITs are required to pay at least 90% of their income—usually derived from rents—each year as dividends to their shareholders. Normally, these dividends are totally subject to taxes, at the ordinary-income rate. But not if they're held in a tax-sheltered Roth.

Direct Real Estate Investments

You can invest in real estate using REITs, or you can go straight to the source. It’s possible to own single-family homes, multiplex homes, apartments, condos, co-ops, and even land for a Roth IRA. But you'll need a self-directed IRA to do so.

To invest in actual property, your Roth must be a self-directed IRA. You’ll need an IRA custodian that specializes in these types of accounts.

There are very specific rules regarding real estate in an IRA. For example:

  • You can’t claim personal deductions for property taxes, mortgage interest, depreciation, and other expenses related to the property.
  • The IRA (not you) owns the real estate. All expenses and repairs must be paid with IRA funds. And you have to buy the property using funds from the account.
  • You can’t maintain the property yourself (no sweat equity). You have to pay someone else, using IRA funds.
  • You and your family can't benefit directly from the property—like using it as a residence, office, or vacation home.

Be sure to do your homework (or work with a financial advisor) to make sure you’re in compliance. Otherwise, you could lose any tax advantages associated with holding real estate in an IRA.

What Not to Invest in a Roth IRA

Since Roth IRAs offer a tax shelter, there's no point in putting tax-exempt assets in one. Case in point: municipal bonds or municipal bond funds.

Money market funds, CDs, and other low-risk, cash-equivalents investments are also ill-suited for a Roth, but for a different reason. What's to shelter in an asset that isn't generating much interest, to begin with? And the liquidity they offer is wasted in an account you aren't going to touch for years.

Annuities are more complicated cases. It depends on how soon you anticipate taking distributions from the Roth. Placing a tax-deferred annuity inside a tax-sheltered IRA on its face doesn’t make a lot of sense if you've decades to go before taking the payouts.

The advantage of a steady, guaranteed tax-free income stream at retirement, however, might justify this strategy—if, say, you're within five years of closing that office door.

Roth IRA Asset Allocation

In terms of how you should allocate assets, that depends on a range of factors, including your age. In general, younger investors have a long-term investment horizon. They would typically allocate more retirement assets to growth- and appreciation-oriented individual stocks or equity funds.

Conversely, those who are retired or close to retirement would typically have a higher allocation of their investments in bonds or income-oriented assets, like REITs or high-dividend equities.

Get Help From the Pros

If you don’t have the time, interest, or expertise to shop for and select investments for your IRA, you have several other options.

One is to put all your IRA money into a single target-date fund. These are designed to work toward the year you plan to retire, automatically rebalancing along the way. They’re named by the year you expect to retire. If that’s 2040, for example, you would select a 2040 target-date fund, such as the Vanguard Target Retirement 2040 Fund (VFORX).

Another option is to use a robo-advisor. That’s a digital platform that builds and manages a portfolio or ETFs using algorithm-driven models. In most cases, you’ll pay a management fee of about 0.25%. However, some brokers such as Charles Schwab provide this service for free.

Finally, you can work with an investment professional who can manage your IRA for you. Many brokerages offer managed accounts. An annual advisory fee typically covers the ongoing management of your money, including investment selection, rebalancing, personal service, and support.

No matter which route you choose, find out ahead of time which fees you’ll have to pay—including expense ratios, commission fees, and account fees—and what they’ll cost you each year. Left unchecked, these fees could quickly erode your earnings, leaving your nest egg a lot lighter come retirement.

The Bottom Line

Overall, the best investments suited to Roth IRAs are those that:

  • Generate high taxable income, be it dividends or interest
  • Have high or frequent turnover, generating short-term capital gains
  • Offer substantial growth/capital appreciation

These investments can truly take advantage of the way the IRS taxes income. And that means more money in your nest egg come retirement.


Ira best fund for

3 Mutual Funds Perfect to Grow Your IRA

For most investors most of the time, a simple index-based mutual fund like the Vanguard 500 Index Fund(NASDAQMUTFUND:VFINX) or an exchange-traded fund (ETF) like the SPDR S&P 500 ETF Trust(NYSEMKT:SPY) is a smart selection. The odds of owning a fund that outperforms the broad market are pretty poor, statistically speaking, so a simpler low-maintenance option just makes good sense.

If it just doesn't feel right to not take at least shot at beating the market, though, don't sweat it. There are still some solid mutual funds offering investors a chance to do so without imposing the sort of risk that a few too many other actively managed funds do. Here's a look at three of these top prospects to consider, particularly for individual retirement accounts.

Fidelity Select Software & IT Services Portfolio

Just as the name suggests, the Fidelity Select Software & IT Services Portfolio(NASDAQMUTFUND:FSCSX) owns a hand-picked selection of software and technology services stocks. Its biggest holdings include Microsoft, Alphabet, and PayPal Holdings, to name a few.

Female investor reviewing her portfolio at a desk.

Image source: Getty Images.

There's an obvious sector-based risk to it: Should technology stocks suddenly fall out of favor, that weakness is going to work against a slew of tech-based funds.

There's also an important nuance of the Fidelity Select Software & IT Services fund, however, that might negate such a headwind. While companies might postpone the purchase of equipment and consumers might choose to skip the purchase of a new gaming console or smartphone, neither businesses nor people are likely to stop using software or the cloud. This fund's key holdings are actually revenue-resilient organizations.

This lower-risk profile alone makes Fidelity Select Software a compelling prospect, but what's interesting is how the fund consistency pairs above-average returns with a rather muted level of risk. Numbers from Morningstar indicate this fund has averaged an annual gain of 24% over the course of the past 10 years, outperforming technology sector benchmarks as well as broad market benchmarks like the S&P 500(SNPINDEX:^GSPC).

Obviously, past performance is no guarantee of future results, but given this fund's design, it's not unreasonable to expect its underlying stocks to keep leading the rest of the market.

Parnassus Mid Cap Fund

The thinking behind ownership of an S&P 500-based index fund is simple, but it's also quite brilliant. Standard & Poor's repeatedly finds that about three-fourths of actively managed mutual funds underperform the broad market. The longer the time frame in question, the worse these active managers tend to do. Ergo, the better-odds play is not to "play" at all, but instead to buy and hold the S&P 500 for the long haul.

The S&P 500 isn't the only stock index, though. There's an entire subset of stocks just below those names that aren't as big as the large caps that make up the S&P 500, but are in a sweet spot for their growth. That's why the S&P 400 Mid Cap Index (SNPINDEX:^MID) has actually outperformed the S&P 500 large-cap index pretty reliably since 1990.

^MID Chart

^MID data by YCharts.

Enter the Parnassus Mid Cap Fund(NASDAQMUTFUND:PARMX). It's not an index fund, for the record, violating one of the chief philosophical reasons for not trying to beat benchmark comparison. Indeed, last year's portfolio turnover of more than 40% is pretty brisk even by the standards of actively managed funds. All of this buying and selling could have translated into a surprisingly shocking tax liability for positions held outside of a tax-deferred account like an IRA.

Still, the Parnassus Mid Cap Fund has index-like qualities. These characteristics paired with its given goal of minimizing the impact of marketwide pullbacks means its investors don't suffer all the seasickness linked to short-lived sell-offs.

There are still bouts of weakness, mind you, and the same holdings that curb the impact of pullbacks also crimp the potential upside of this fund compared to the S&P 400 Mid Cap Index. On balance, however, the trade-off is worth it in that you're still plugged into a group of equities with a track record of outperforming the most commonly used S&P 500.

Oakmark Fund

Last, add the Oakmark Fund(NASDAQMUTFUND:OAKMX) to your list of funds well suited for retirement accounts. You might also see this mutual fund referred to as Oakmark 1. Just don't confuse it with the Oakmark Equity & Income Fund(NASDAQMUTFUND:OAKBX), which is also sometimes listed with a "1" suffix. Just make sure you're using the OAKMX symbol and you'll be fine.

It's another actively managed fund, bucking the premise that most investors are generally better served by passive investments in index-based instruments. The Oakmark Fund is also (usually) categorized as a value fund, leading to below-average results since the 1990s, when investors fell in love with growth stories and have never really fallen out of love.

With chatter that value stocks might finally be in vogue again, however, owners of the Oakmark Fund would be entering this new paradigm with one of the top value-oriented funds available. While value names have been trailing growth stocks for years now, this particular fund has outperformed value-based indexes in the past one-, three-, five-, and 10-year time frames, according to data from Morningstar. That's quite impressive in light of how little differentiation there is among value stocks.

Of course, Oakmark's loose definition of what constitutes a "value" stock is a big advantage. The fund's top holdings like Bank of America and Comcast are readily recognized as value picks, but they sit side by side with Alphabet and Facebook as the fund's biggest positions. Regardless, it works.

How to Choose Fidelity Index Funds -- My Fidelity Roth IRA EXPOSED

Best index funds in October 2021

Index funds are popular with investors because they promise ownership of a wide variety of stocks, greater diversification and lower risk – usually all at a low price. That’s why many investors, especially beginners, find index funds to be superior investments to individual stocks.

Among the best are index funds based on the Standard & Poor’s 500 Index (S&P 500). The index includes hundreds of the largest, globally diversified American companies across every industry, making it a relatively low-risk way to invest in stocks. Of course, as 2020 showed, even the whole market can fluctuate dramatically, especially if something momentous happens.

This index is the very definition of the market, and by owning a fund based on the index, you’ll get the market’s return, historically about 10 percent per year. It’s among the most popular indexes.

Here’s everything you need to know about index funds, including five of the top index funds to consider adding to your portfolio this year.

Best index funds for October 2021

The list below includes S&P 500 index funds from a variety of companies, and it includes some of the lowest-cost funds trading on the public markets. When it comes to an index fund like this, one of the most important factors in your total return is cost. Included are two mutual funds and three ETFs:

1. Fidelity ZERO Large Cap Index

2. Vanguard S&P 500 ETF

3. SPDR S&P 500 ETF Trust

4. iShares Core S&P 500 ETF

5. Schwab S&P 500 Index Fund

1. Fidelity ZERO Large Cap Index (FNILX)

The Fidelity ZERO Large Cap Index mutual fund is part of the investment company’s foray into mutual funds with no expense ratio, thus its ZERO moniker. The fund doesn’t officially track the S&P 500 – technically it follows the Fidelity U.S. Large Cap Index – but the difference is academic. The real difference is that investor-friendly Fidelity doesn’t have to cough up a licensing fee to use the S&P name, keeping costs lower for investors.

Expense ratio: 0 percent. That means every $10,000 invested would cost $0 annually.

2. Vanguard S&P 500 ETF (VOO)

As its name suggests, the Vanguard S&P 500 tracks the S&P 500 index, and it’s one of the largest funds on the market with hundreds of billions in the fund. This ETF began trading in 2010, and it’s backed by Vanguard, one of the powerhouses of the fund industry.

Expense ratio: 0.03 percent. That means every $10,000 invested would cost $3 annually.

3. SPDR S&P 500 ETF Trust (SPY)

The SPDR S&P 500 ETF is the granddaddy of ETFs, having been founded all the way back in 1993. It helped kick off the wave of ETF investing that has become so popular today. With hundreds of billions in the fund, it’s among the most popular ETFs. The fund is sponsored by State Street Global Advisors — another heavyweight in the industry — and it tracks the S&P 500.

Expense ratio: 0.09 percent. That means every $10,000 invested would cost $9 annually.

4. iShares Core S&P 500 ETF (IVV)

The iShares Core S&P 500 ETF is a fund sponsored by one of the largest fund companies, BlackRock. This iShares fund is one of the largest ETFs and like these other large funds, it tracks the S&P 500. With an inception date of 2000, this fund is another long-tenured player that’s tracked the index closely over time.

Expense ratio: 0.03 percent. That means every $10,000 invested would cost $3 annually.

5. Schwab S&P 500 Index Fund (SWPPX)

With tens of billions in assets, the Schwab S&P 500 Index Fund is on the smaller side of the heavyweights on this list, but that’s not really a concern for investors. This mutual fund has a strong record dating back to 1997, and it’s sponsored by Charles Schwab, one of the most respected names in the industry. Schwab is especially noted for its focus on making investor-friendly products, as evidenced by this fund’s razor-thin expense ratio.

Expense ratio: 0.02 percent. That means every $10,000 invested would cost $2 annually.

Why are index funds so popular?

The S&P 500 index fund continues to be among the most popular index funds. S&P 500 funds offer a good return over time, they’re diversified and a relatively low-risk way to invest in stocks.

  • Attractive returns – Like all stocks, the S&P 500 will fluctuate. But over time the index has returned about 10 percent annually. That doesn’t mean index funds make money every year, but over long periods of time that’s been the average return.
  • Diversification – Investors like index funds because they offer immediate diversification. With one purchase, investors can own a wide swath of companies. One share of an index fund based on the S&P 500 provides ownership in hundreds of companies.
  • Lower risk – Because they’re diversified, investing in an index fund is lower risk than owning a few individual stocks. That doesn’t mean you can’t lose money or that they’re as safe as a CD, for example, but the index will usually fluctuate a lot less than an individual stock.
  • Low cost – Index funds can charge very little for these benefits, with a low expense ratio. For larger funds you may pay $3 to $10 per year for every $10,000 you have invested. In fact, one fund (listed above) charges you no expense ratio at all. When it comes to index funds, cost is one of the most important factors in your total return.

While some funds such as S&P 500 index funds allow you to own companies across industries, others own only a specific industry, country or even investing style (say, dividend stocks).

How to invest in an index fund in 3 easy steps

It’s surprisingly easy to invest in an index fund, but you’ll want to know what you’re investing in, not simply buy random funds that you know little about.

1. Choose an index fund to invest in

Your first step is finding what you want to invest in. While an S&P 500 index fund is the most popular index fund, they also exist for different industries, countries and even investment styles. So you need to consider what exactly you want to invest in and why it might hold opportunity:

  • Location: Consider the geographic location of the investments. A broad index such as the S&P 500 owns American companies, while other index funds might focus on a narrower location (France) or an equally broad one (Asia-Pacific).
  • Business: Which industry or industries is the index fund investing in? Is it invested in pharma companies making new drugs, or maybe tech companies? Some funds specialize in certain industries and avoid others.
  • Market opportunity: What opportunity does the index fund present? Is the fund buying pharma companies because they’re making the next blockbuster drug or because they’re cash cows paying dividends? Some funds invest in high-yield stocks while others want high-growth stocks.

You’ll want to carefully examine what the fund is investing in, so you have some idea of what you actually own. Sometimes the labels on an index fund can be misleading. But you can check the index’s holdings to see exactly what’s in the fund.

2. Decide which index fund to buy

After you’ve found a fund you like, you can look at other factors that may make it a good fit for your portfolio. The fund’s expenses are huge factors that could make – or cost – you tens of thousands of dollars over time.

  • Expenses: Compare the expenses of each fund you’re considering. Sometimes a fund based on a similar index can charge 20 times as much as another.
  • Taxes: For certain legal reasons, mutual funds tend to be less tax-efficient than ETFs. At the end of the year many mutual funds pay a taxable capital gains distribution, while ETFs do not.
  • Investment minimums: Many mutual funds have a minimum investment amount for your first purchase, often several thousand dollars. In contrast, many ETFs have no such rule, and your broker may even allow you to buy fractional shares with just a few dollars.

3. Purchase your index fund

After you’ve decided which fund fits in your portfolio, it’s time for the easy part – actually buying the fund. You can either buy directly from the mutual fund company or through a broker. But it’s usually easier to buy a mutual fund through a broker. And if you’re buying an ETF, you’ll need to go through your broker.

Things to consider when investing in index funds

As you’re looking at index funds, you’ll want to consider the following factors:

  • Long-run performance: It’s important to track the long-term performance of the index fund (ideally at least five to ten years of performance) to see what your potential future returns might be. Each fund may track a different index or do better than another fund, and some indexes do better than others over time. Long-run performance is your best gauge to what you might expect in the future, but it’s no guarantee, either.
  • Expense ratio: The expense ratio shows what you’re paying for the fund’s performance on an annual basis. For funds that track the same index, such as the S&P 500, it makes little sense to pay more than you have to. Other index funds may track indexes that have better long-term performance, potentially justifying a higher expense ratio.
  • Trading costs: Some brokers offer very attractive prices when you’re buying mutual funds, even more so than the same mutual fund company itself. If you’re going with an ETF, virtually all major online brokers now allow you to trade without a commission. Also, if you’re buying a mutual fund, beware of sales loads, or commissions, which can easily lop off 1 or 2 percent of your money before it’s invested. These are easy to avoid by choosing funds carefully, such as those from Vanguard and many others.
  • Fund options: Not all brokers will offer all mutual funds, however. So you’ll need to see whether your broker offers a specific fund family. In contrast, ETFs are typically available at all brokers because they’re all traded on an exchange.
  • Convenience: It may be a lot easier to go with a mutual fund that your broker offers on its platform rather than open a new brokerage account. But going with an ETF instead of a mutual fund may also allow you to sidestep this issue.

Can an index fund investor lose everything?

Putting money into any market-based investment such as stocks or bonds means that investors could lose it all if the company or government issuing the security runs into severe trouble. However, the situation is a bit different for index funds because they’re often so diversified.

An index fund usually owns at least dozens of securities and may own potentially hundreds of them, meaning that it’s highly diversified. In the case of a stock index fund, for example, every stock would have to go to zero for the index fund, and thus the investor, to lose everything. So while it’s theoretically possible to lose everything, it doesn’t happen for standard funds.

That said, an index fund could underperform and lose money for years, depending on what it’s invested in. But the odds that an index fund loses everything are very low.

What is considered a good expense ratio?

Mutual funds and ETFs have among the cheapest average expense ratios, and the figure also depends on whether they’re investing in bonds or stocks. In 2020, the average stock index mutual fund charged 0.06 percent (on an asset-weighted basis), or $6 for every $10,000 invested. The average stock index ETF charged 0.18 percent (asset-weighted), or $18 for every $10,000 invested.

Index funds tend to be much cheaper than average funds. Compare the numbers above with the average stock mutual fund (on an asset-weighted basis), which charged 0.54 percent, or the average stock ETF, which charged 0.18 percent. While the ETF expense ratio is the same in each case, the cost for mutual funds generally is higher. Many mutual funds are not index funds, and they charge higher fees to pay the higher expenses of their investment management teams.

So anything below the average should be considered a good expense ratio. But it’s important to keep these costs in perspective and realize that the difference between an expense ratio of 0.10 percent and 0.05 percent is just $5 per year for every $10,000 invested. Still, there’s no reason to pay more for an index fund tracking the same index.

Is now a good time to buy index funds?

If you’re buying a stock index fund or almost any broadly diversified stock fund such as an S&P 500 fund, it can be a good time to buy. That’s because the market tends to rise over time, as the economy grows and corporate profits increase. In this regard, time is your best friend, because it allows you to compound your money, letting your money make money. That said, narrowly diversified index funds (such as funds focused on one industry) may do poorly for years.

Investors need to take a long-term mindset, however, and experts recommend adding money to the market regularly. You’ll take advantage of dollar cost averaging and lower your risk. A strong investing discipline can help you make money in the market over time. Investors should avoid timing the market, that is, jumping in and out of the market to capture gains and dodge losses.

Index fund FAQ

If you’re looking to get into index funds, you may still have a few more questions. Here are answers to some of the most frequently asked questions that investors have about them.

How do index funds work?

An index fund is an investment fund – either a mutual fund or an exchange-traded fund (ETF) – that is based on a preset basket of stocks, or index. This index may be created by the fund manager itself or by another company such as an investment bank or a brokerage.

These fund managers then mimic the index, creating a fund that looks as much as possible like the index, without actively managing the fund. Over time the index changes, as companies are added and removed, and the fund manager mechanically replicates those changes in the fund.

Because of this approach, index funds are considered a type of passive investing, rather than active investing where a fund manager analyzes stocks and tries to pick the best performers.

This passive approach means that index funds tend to have low expense ratios, keeping them cheap for investors getting into the market.

Some of the most well-known indexes include the S&P 500, the Dow Jones Industrial Average and the Nasdaq 100. Indexing is a popular strategy for ETFs to use, and most ETFs are based on indexes.

What sort of fees are associated with index funds?

Index funds may have a couple different kinds of fees associated with them, depending on which type of index fund:

  • Mutual funds: Index funds sponsored by mutual fund companies may charge two kinds of fees: a sales load and an expense ratio.
    • A sales load is just a commission for buying the fund, and it may happen when you buy or when you sell or over time. Investors can usually avoid these by going with an investor-friendly fund company such as Vanguard, Schwab or Fidelity.
    • An expense ratio is an ongoing fee paid to the fund company based on the assets you have in the fund. Typically these are charged daily and come out of the account seamlessly.
  • ETFs: Index funds sponsored by ETF companies (many of which also run mutual funds) charge only one kind of fee, an expense ratio. It works the same way as it would with a mutual fund, with a tiny portion seamlessly deducted each day you hold the fund.

ETFs have become more popular recently because they help investors avoid some of the higher fees associated with mutual funds. ETFs are also becoming popular because they offer other key advantages over mutual funds.

Bottom line

These are some of the best S&P 500 index funds on the market, offering investors a way to own the stocks of the S&P 500 at low cost, while still enjoying the benefits of diversification and lower risk. With those benefits, it’s no surprise that these are some of the largest funds on the market.

Learn more:

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.


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The Best Target Date Funds For Retirement

We considered several factors to identify the best target date funds, including fees, performance, asset allocation and glide path.


Studies show that fees are a good indicator of a fund’s success. The lower the fees, the more likely the fund will outperform its more expensive counterparts. That’s not to say that expenses should be our only criteria, but they are an important one.

Most of the funds in our list have expense ratios below 50 basis points, and the most expensive is 80 basis points. There are target date funds, however, that cost more than 100 basis points. We believe that the performance of these funds do not justify the cost.


While target date funds have been around since the 1990s, performance data is limited. Because mutual fund companies have made changes to their target date funds, performance data are limited to 5-year returns. Our list will likely change as 10-year returns become available over the next several years.

Asset Allocation

The asset allocation of a target date retirement fund changes over time. In 2060 funds, equities are heavily weighted as investors have 40 years until retirement. In contrast, 2020 funds typically have no more than about 50% in equities, as those retiring in 2020 begin to use fund assets for living expenses.

While we weren’t looking for one “right” allocation, we did look for equity allocations above 80% in 2060 funds. The seven funds in our list typically allocated 90% to equities, although one fund had an 85% allocation. For the 2020 funds we examined, the range of equity allocations was more varied. They ranged from a high of 60% to a low of 35%.

Based on research by William Bengen (and others) on the 4% rule, we believe a retiree should have an equity allocation of at least 50%. As the allocation falls below this level, the longevity of the portfolio decreases. In other words, the odds of a retiree running out of money during retirement goes up. Unfortunately, while some target date funds maintain a 50% equity allocation at retirement, they all fall significantly below this level as the retiree ages.

Glide Path

Glide path describes how the asset allocation of a target date fund changes over time. There are “to” and “through” glide paths. With a “to” glide path, the allocation does not change once the fund reaches its designated year. For example, a 2020 fund’s asset allocation wouldn’t change in 2021, 2022, or even 2040.

In contrast, a “through” glide path continues to alter the asset allocation of a fund after its designated year. All of the funds in our list use a “through” glide path. For some, the changes in asset allocation stop after about five to seven years. For others, the changes continue for decades.

While we are agnostic on the “to” versus “through” debate, the same is not true for the stock to bond allocation. In all target date funds we examined, the equity allocations fall far below the 50% mark. As such, those using target date funds should carefully consider whether these funds best meet their needs in retirement.

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