ETF vs. Mutual Funds: Which is Right for Your IRA?

When building a retirement portfolio, the vehicle you choose is almost as important as the destination. Exchange-Traded Funds (ETFs) have exploded in popularity, but mutual funds still hold trillions in assets. Which belongs in your Individual Retirement Account (IRA)?

The Tax Efficiency Argument

ETFs are structured differently. Due to the “in-kind” creation and redemption mechanism, ETFs rarely distribute capital gains to shareholders until the shares are sold. Mutual funds, however, often pass on capital gains taxes at the end of the year, even if you didn’t sell a single share.

Note: Inside an IRA, this tax difference is moot because growth is tax-deferred (Traditional) or tax-free (Roth).

Trading Flexibility

• ETFs: Trade like stocks. You can buy or sell them throughout the trading day at the current market price.
• Mutual Funds: Price once a day at the market close (NAV).

The Verdict

For active traders or taxable brokerage accounts, ETFs are the clear winner. For long-term “set it and forget it” investors contributing monthly to an IRA, mutual funds allow for automatic investing of partial shares (dollar-cost averaging) more easily than many ETF platforms.