Can I Contribute to a Roth IRA & Mutual Funds?

by Vicki A. Benge

Investors can invest in mutual funds as part of a Roth investment retirement account (IRA), and may also purchase mutual funds outside the IRA as an additional investment for retirement at the same time. There is nothing prohibiting investors from partaking in both investment vehicles. However, if you invest in mutual funds outside of a Roth IRA, you will not receive the tax benefits you'd get if the same funds were invested through your Roth IRA.

Roth IRA Holdings

Contents of a Roth IRA account vary depending on the preferences of the account holder. For example, a Roth IRA may invest exclusively in mutual funds or own a mix of individual stocks and bonds and money market instruments. Contrastingly, a Roth IRA account may consist solely of real estate investments or only bank certificates of deposit (CDs). Since distributions are tax exempt, a profitable place for growth investing is in a Roth IRA.

Mutual Funds in a Roth IRA

Many investment companies and brokerage firms allow investors to purchase mutual funds shares with a Roth IRA. Two broad index funds, one consisting of stocks and one consisting of bonds can provide the account holder with instant diversification without purchasing multiple products. Investors who use funds that own both stocks and bonds in their retirement accounts have been found to earn better yields following a financial crisis than investors who were not well diversified.

Federal Regulations

Internal Revenue Service guidelines, taken from Title 26,408A of the United States Code, set forth the federal laws concerning Roth IRAs. According to the IRS, the maximum amount an individual could contribute to an IRA in 2011 is $5,000 if under age 50, or $6,000 if 50 or older. Once the contributions limits are reached for IRA contributions, an individual may wish to contribute more than the maximum toward retirement. One option is to invest in mutual funds outside the IRA, where restrictions do not apply to contribution amounts.

Mutual Funds in Addition to an IRA

Contributing investment dollars to a mutual fund outside a Roth IRA can give you an additional opportunity of increasing wealth. The U.S. Department of Labor Employee Benefits Security Administration strongly encourages diversification. Therefore, if you use both a Roth IRA and mutual funds purchased separately to fund a nest egg, you would not want to duplicate holdings in the IRA and the mutual funds, but instead diversify your holdings.