Roth IRA Vs. Index Fund

A Roth IRA is a type/classification of account that permits investment for retirement. Index funds are mutual funds constructed to emulate a market or industry benchmark. Investors may establish a Roth IRA and fund it with the purchase of index mutual fund shares.

IRA History

In the early 1970s, legislation was passed to permit people without company-sponsored retirement plans to set up their own self-directed retirement accounts and manage them individually.

Traditional IRAs

Investments in individual retirement accounts permit a tax deduction on contributions and tax-deferred accumulation. The money is taxed when withdrawn after retirement. Limits and restrictions apply.

Roth IRAs

The Roth IRA was introduced from the Taxpayer Relief Act of 1997. Roth IRAs are funded with non-deductible after-tax dollars. As a result, withdrawals are tax-free.

Index Mutual Funds

Also in the early 1970s, unmanaged funds that track underlying benchmarks were introduced. Without an active portfolio manager, index fund expenses are lower than those of typical mutual funds.

Index Fund Objectives

Initially, index funds followed very few benchmarks; the S&P 500 Index was the first. Since then, hundreds have been offered. They track benchmarks for different countries and varying categories of equity or fixed-income, sectors, and market size.