As long as you keep sending me questions, I'll do my best to answer them each week (if you're comfortable letting me). You can ask a question here.
This week's question comes from Solomon, who was wondering what the difference is between a Roth IRA and an ETF…check it out:
I have a Roth IRA that I have been putting money into. I've read all about them and I thought I understood it all. Then I decided I wanted to try out some ETF investing. I do both of these things through Vanguard. I opened a brokerage account with Vanguard, but the money I transferred over (and used to buy ETFs) counted towards my Roth IRA contributions. I'm okay with this now, but it has me a little confused. Do I need to open another brokerage account to use money that WON'T go towards my Roth IRA contributions? What am I missing?
Thanks for reaching out Solomon. I think the easiest way I can answer this question is to describe a Roth IRA.
A Roth IRA is a like a picnic basket for your retirement. It just holds everything you need, and has certain rules attached to it. Inside the picnic basket that is your Roth IRA, you can invest in just about anything you want: including ETFs.
I think it is confusing because at many brokerages, Vanguard included, you have to transfer money to them first, and then into the Roth IRA. And once it is in the Roth IRA, it still just sits in cash until you do something with it. The important thing is to not pull it out, like you learned the hard way.
Once you have your cash deposited into your Roth IRA, you simply pick out the stocks, bonds, ETFs, or mutual funds you want to invest in, and execute the trade within your Roth IRA. There is no need to open another brokerage account just to trade ETFs.
Over the past few years, I've put together quite a few articles on Roth IRAs that you may want to check out:
- When to Open a Roth IRA
- The Best Ways to Maximize Your IRA Potential
- The 5 Worst IRA Mistakes Made Everyday
- A Roth IRA Isn't That Hard to Understand
Finally, if you'd like more general investing information, you can check out my Investing 101 Resource Page.
Readers, do you have any thoughts on the right investments for a Roth IRA?