With exchange traded funds, investors can take a balanced approach in growing their assets through self-directed brokerage accounts as well as individual retirement accounts.
In an IRA account, ETF investors can grow their assets tax-deferred or tax-free as a way to lower overall costs, choosing between a traditional IRA or a Roth IRA, according to Morningstar ETF analyst Abby Woodham. With an IRA, investors can buy and sell ETFs without realizing capital gains or pay taxes on distributions. [Why Retirees Are Turning to ETFs for $1 Million Goal]
“An IRA account is a good location for income-generating assets, such as bond and dividend ETFs,” Woodham writes. “Young investors will have a relatively tiny allocation to bonds, but that amount will grow over time as they approach retirement. Dividend ETFs, which take up a 10% allocation in our ETF model portfolios, also make sense in an IRA, as tax-free compounding of reinvested dividends is a powerful force.”
For a traditional IRA, contributions are tax-deductible and grow year-to-year without triggering taxes. However, during retirement, any withdrawals are taxed at the investor’s ordinary income rate.
On the other hand, Roth IRA contributions are made after income tax is paid. Currently, investors can throw in $5,500 per year into a Roth IRA if they have an income less than $125,000,