Can I invest in ETFs in my IRA?

Account type vs. investment type

So what’s the relationship between an IRA and an ETF? Think of an IRA like a taco shell. That shell is your account—your IRA. You might prefer a hard or a soft shell, similar to how you might prefer a Roth or a traditional IRA (or a SEP-IRA if you’re self-employed*).

When you’re stuffing that shell, what are you going to put inside of it? Cheese? Sour cream? Maybe a little of both? You’ll make similar choices with an IRA. What ingredients—that is, investment products—will you add: ETFs, mutual funds, or both? 

Neither choice is right or wrong—both options are wide open to you. (This can be much different from the investment options you have in a 401(k), which are limited to what your employer decided to include in the plan.)

Which should I choose: ETFs or mutual funds?

The answer depends on a few factors, which we’ll get to in a moment. But first, you may be surprised to learn that ETFs and mutual funds have more similarities than differences.

  • Both offer opportunities to invest in a mix of stocks or bonds across almost every U.S. and international market.
  • Both come with built-in diversification that you can’t get by investing directly in individual stocks or bonds. In fact, some—particularly index funds—contain hundreds or thousands of stocks or bonds in a single fund, which can help reduce your overall risk.
  • Vanguard ETFs® are available with no commissions; and most mutual funds are available with no transaction fees. When you buy Vanguard ETFs in your Vanguard Brokerage Account (IRA or otherwise), you’ll pay no commissions. And there are no transaction fees** on most Vanguard mutual funds. (Commission-free trading of Vanguard ETFs applies to trades placed both online and by phone. Learn more about other conditions & costs that may apply.)

But there are a few differences that might lead you to select one over the other.

For example, if you’re just getting started and looking for lower minimum investment requirements, you may prefer ETFs because they don’t carry any account balance minimum beyond the price of 1 share, which typically ranges from about $50 to a few hundred dollars.

If “setting and forgetting” your IRA contributions is your top priority, mutual funds have an edge over ETFs because you can automate contributions to mutual funds (but not to ETFs).

The “ETF or mutual fund” decision takes a distant second to …

Asset allocation, sometimes referred to as “asset mix.”

Start with your asset allocationWhy? Because research has shown that a whopping 90% or more of your experience—that is, a combination of the volatility you encounter and the returns you earn—can be traced back to how you divide your savings among stock and bond investments.***

So maybe your first move is a step back to consider your asset allocation. Does it properly reflect how much time you have to save combined with how much your investments keep you up at night (that is, your risk tolerance)?

But don’t worry; it’s not rocket science. In just a few minutes, you can get a pretty good idea of what the “right” balance might be for you. Just answer a few questions in our investor questionnaire.

You’ve decided on your asset allocation. Now what?

If you’re interested in using ETFs to save for retirement, you have a few different angles to consider:

Want to keep things as streamlined as possible?

You can construct an all-ETF portfolio with as few as 4 total market ETFs. When used together, these 4 ETFs cover almost every aspect of the U.S. and international stock and bond markets.

Need more options?

If 4 ETFs are too few but looking at every possible option feels overwhelming, try Vanguard Select ETFs™, a list of 13 ETFs that was compiled by a team of Vanguard investment experts to help you build a diversified portfolio.

Want to explore yourself?

Browse a list of dozens of Vanguard ETFs.

Before you go …

Here are a few more answers to common questions we get about how ETFs work in IRAs.

Do IRA maximum contribution limits change when investing in ETFs?
No. IRA contribution limits remain the same whether you invest in ETFs or mutual funds. For the 2019 tax year, the limits are $6,000 if you’re under age 50 and $7,000 if you’re age 50 or older.

Are ETFs taxed differently than mutual funds in an IRA?
No. IRA withdrawals are taxed based on your age and the type of IRA you have—Roth or traditional—not on the type of investments you have in your IRA.

*ETFs aren’t available in Individual 401(k)s and SIMPLE IRAs at Vanguard.
**Very few Vanguard funds charge fees when you buy and sell shares. The fees are designed to help those funds cover higher transaction costs and protect long-term investors by discouraging short-term, speculative trading. Fees vary from 0.25% to 1.00% of the amount of the transaction.
***Source: Brian J. Scott, James Balsamo, Kelly N. McShane, et al., 2017. The Global Case for Strategic Asset Allocation and an Examination of Home Bias. Valley Forge, Pa.: The Vanguard Group.
†When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% penalty tax.


Leave a Reply

Skip to toolbar