IRAs vs Mutual Funds: Which Is the Better Investment for You?

Comparing IRAs and mutual funds is somewhat like comparing apples and oranges. A mutual fund is a professionally managed investment portfolio. An IRA, or individual retirement account, can hold various investments, including stocks and mutual funds.

Despite their differences, IRAs and mutual funds can be evaluated side-by-side. A decision on which option to choose may depend on what you hope to accomplish.

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Here are some factors to consider:

IRAs and mutual funds differ in their primary goal. The federal government created IRAs as a vehicle to save for retirement, though they can be used for other purposes, according to The Nest. Managers of mutual funds seek to provide the highest return on investment through strategic buying and selling of stocks and bonds.

An IRA offers virtually limitless investment options, including stocks, bonds, mutual funds, commodities and certificates of deposit. The mutual fund offers one option — having your contribution invested in shares of the mutual fund, reports The Nest.

But literally thousands of types of mutual funds are on the market, with some seeking to mimic the return of such indexes as the Dow Jones Industrial Average while others focus on niches such as certain regions of the world or sectors of the economy.

Most IRA holders possess one of two types of IRA accounts — a Roth IRA or a traditional IRA. IRA holders also may choose between fixed-rate and variable rate options, with the fixed rate bringing a more consistent return while the variable rate provides more risk as well as more opportunity for reward.

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IRAs are more attractive from a tax standpoint. The federal government allows various tax benefits for holders of both traditional and Roth IRAs, according to The Nest. Mutual funds, unless held in an IRA, do not provide those tax benefits and in fact, usually trigger taxable events.

Mutual fund holders must report capital gains and pay taxes on them when they sell mutual fund shares, and must also report and pay taxes on any distributions they receive from dividends from stocks they own.

But mutual fund members need not worry about being assessed a penalty for withdrawing their money from the fund before they reach a certain age. IRA holders generally must pay a 10 percent penalty on any withdrawals they make from their IRA before they turn 59 and a half years old, according to Bankrate.

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