How Often Can You Trade Between Mutual Funds in a Roth IRA?

Mutual funds are a great way to create a solid retirement-savings buffer. If they're held in a tax-protected account like a Roth IRA, they can appreciate in value and throw off dividends for many years without exposing you to ongoing tax liabilities. Even better, mutual funds are regarded as less risky than the overall stock market. If you want to diversify your holdings away from "boring" investments like savings accounts and CDs but worry about the market's volatility, you should look at some of the dynamic mutual funds that have cropped up in recent years. Many of these produce steady annual gains of between 5 and 10 percent without exposing their investors to precipitous market drops.

However, mutual funds come with plenty of restrictions designed to discourage the frequent buying and selling of these vehicles. While there are no such buying and selling restrictions attached to Roth IRAs, the presence of mutual funds within your IRA may place serious constraints on your ability to move your money around within short time frames.

For instance, some mutual funds come with initial "probationary" periods during which they can't be bought or sold within any type of brokerage account. This period may last for between two and six months. In effect, this means that you'll be unable to exchange your mutual funds more than a few times per year. As such, you should carefully research any funds in which you'd like to invest to ensure that you're making the correct decision. Otherwise, you'll be stuck with a bad investment that you won't be able to offload for several months.

If you prefer to deal with more liquid investment classes, consider purchasing individual stocks or ETFs. While your risk appetite might not allow for the purchase of certain stocks, many ETFs behave like more conservatively-structured mutual funds. However, they can be traded on a daily basis and may use mainstream stock exchanges to increase their liquidity. Crucially, they can be included in the same tax-protected retirement accounts in which you're likely to store your mutual funds.

There are some important differences between ETFs and regular stocks. Like mutual funds, most ETFs are subject to management fees that can range between .5 and 2 percent. These are assessed on an annual basis and can depress the performance of the funds to which they're attached. By contrast, regular stocks carry no ongoing management fees and may produce larger returns as a result.

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