You can buy mutual funds through a brokerage account, a retirement account, or directly from the fund company
The place you buy mutual funds depends on what you want the money to do. If you are saving for retirement, you will likely use a retirement account like a 401(k) or IRA, which offers tax advantages. If you are investing money outside retirement, you will open a brokerage account at a bank, investment firm, or online broker. Some fund companies also let you buy directly from them, though this limits you to their own funds. Each route has different costs, different fund choices, and different rules about when you can take the money out.
The account type matters more than the institution. A brokerage account at a large firm and a brokerage account at a discount online broker both work the same way legally — you own the funds, you can sell them whenever you want, and you pay taxes on gains. The difference is in fees, the number of funds available, and how much help you get. A retirement account, by contrast, locks the money away until age 59½ in most cases, but the government does not tax the growth until you withdraw it.
Key Takeaways
- Brokerage accounts let you buy and sell mutual funds whenever you want, but you pay income tax on any gains each year.
- Retirement accounts like 401(k)s and IRAs delay taxes on growth, but you cannot withdraw the money before age 59½ without a penalty in most cases.
- Online brokers and discount brokers typically charge lower fees than full-service firms, though they offer less personal guidance.
- Some fund companies let you buy their funds directly, which can save on fees but limits you to that company's offerings.
- The same mutual fund can cost different amounts depending on which account type you use and which institution sells it to you.
Brokerage accounts: buying mutual funds outside retirement
A brokerage account is a regular investment account where you can buy and sell mutual funds, stocks, and bonds. You can withdraw the money whenever you want with no penalty. You open one by going to a bank, an investment firm, or an online broker, giving them your name and Social Security number, and funding the account with a deposit. The firm holds the funds in your name and sends you statements showing what you own.
Brokerage accounts come in two main types. A taxable brokerage account means you pay federal income tax each year on any dividends the fund pays and on any gains when you sell. A tax-loss harvesting account or similar structure lets you offset some gains with losses, but you still pay tax. The tax bill arrives whether you withdraw the money or not — it is based on what the fund earned, not on what you took out.
The cost of a brokerage account varies widely. Some firms charge a flat monthly fee ($5 to $20), some charge per trade ($5 to $10 per transaction), and some charge nothing at all. Many online brokers now offer commission-free mutual fund purchases. However, the fund itself may charge an internal fee called an expense ratio, which ranges from under 0.1% per year for index funds to 1% or more for actively managed funds. This fee comes out of the fund's value automatically and is separate from what the brokerage charges you.
Retirement accounts: 401(k)s, IRAs, and similar plans
A 401(k) is a retirement account offered by your employer. You contribute money from your paycheck before taxes are taken out, and the money grows without being taxed each year. You cannot withdraw it before age 59½ without paying a 10% penalty plus income tax on the amount withdrawn. A 401(k) typically offers a limited menu of mutual funds chosen by your employer, not by you. Some employers also match a portion of what you contribute, which is assistance programs.
An IRA (Individual Retirement Account) is a retirement account you open on your own, not through an employer. A Traditional IRA works like a 401(k) — contributions may be tax-deductible, and growth is not taxed until you withdraw. A Roth IRA uses after-tax money, but growth and withdrawals are tax-free in retirement. IRAs let you choose from nearly any mutual fund available, giving you much more control than a 401(k). You can open an IRA at a bank, brokerage, or online broker.
The cost of a retirement account depends on the institution and the fund. Some IRAs charge an annual account fee ($0 to $50), and some charge nothing. The mutual funds inside the account still charge their own expense ratios. Employer 401(k)s sometimes charge higher fees than IRAs because the employer negotiates on behalf of many workers, and the plan administrator takes a cut. You can ask your employer for a fee breakdown if you are in a 401(k).
Online brokers and discount brokers
An online broker is a firm that lets you open a brokerage or IRA account entirely through a website or app, with no in-person branch. Examples include Fidelity, Charles Schwab, E-Trade, and Vanguard. These firms typically charge no account fees and no commissions on mutual fund purchases. They offer thousands of mutual funds, including their own and those from other companies. You manage your account yourself using their website or app.
Discount brokers are similar but usually smaller and may have fewer features. The main advantage of online and discount brokers is cost — you avoid the high fees of a full-service firm. The main disadvantage is that you get no personal advice. If you want someone to help you choose funds or review your strategy, you will need to pay for that separately or go to a full-service firm.
Most online brokers now offer fractional shares, meaning you can buy a portion of a mutual fund with a small amount of money instead of having to buy a whole share. This makes it easier to start investing with $50 or $100 instead of waiting to save $1,000 or more.
Full-service brokers and financial advisors
A full-service broker is a large firm like Merrill Lynch, Morgan Stanley, or UBS that offers personal advice along with account management. You work with a broker or advisor who helps you choose funds, reviews your portfolio, and adjusts your strategy over time. Full-service firms charge higher fees than online brokers — typically 0.5% to 2% of the money you invest per year, plus the expense ratios of the funds themselves.
Full-service brokers make sense if you have a large amount to invest, want ongoing advice, or feel overwhelmed by choices. They also make sense if you want someone to manage your account for you. However, you pay for this service, and the cost adds up over time. A 1% annual fee on $100,000 is $1,000 per year, which is money that does not go into your investments.
Some full-service brokers are fiduciaries, meaning they are legally required to act in your best interest. Others are not, and they only have to recommend products that are "suitable" for you, which is a lower standard. Ask your broker whether they are a fiduciary before you hand over money.
Direct investment from the fund company
Some mutual fund companies let you buy their funds directly without going through a brokerage. Vanguard, Fidelity, and T. Rowe Price all offer this option. You open an account with the fund company, deposit money, and buy their funds. The advantage is that you avoid paying a brokerage fee. The disadvantage is that you can only buy that company's funds, so you have less choice.
Direct investment makes sense if you have decided on a specific fund company and want to keep things simple. It also makes sense if you are investing a small amount and want to avoid fees. However, most people end up wanting access to funds from multiple companies, which means opening a brokerage account anyway. Once you have a brokerage account, you can buy funds from any company, so the direct route becomes unnecessary.
How costs differ by account type and institution
| Account Type | Account Fee | Trading Fee | Fund Choices | Tax Treatment |
|---|---|---|---|---|
| Online brokerage | Usually $0 | Usually $0 | Thousands | Taxable each year |
| Full-service brokerage | $0 to $300/year | $5 to $50 per trade | Thousands | Taxable each year |
| Traditional IRA | $0 to $50/year | Usually $0 | Thousands | Tax-deferred |
| Roth IRA | $0 to $50/year | Usually $0 | Thousands | Tax-free growth |
| Employer 401(k) | $0 to $100/year | $0 | 20 to 50 options | Tax-deferred |
| Direct from fund company | $0 to $25/year | $0 | That company only | Taxable each year |
Frequently Asked Questions
Can I move mutual funds from one account to another?
Yes, but the rules depend on the account type. You can move funds between brokerage accounts without penalty. Moving funds from a Traditional IRA to another Traditional IRA is also penalty-free if done correctly. Moving funds from a Traditional IRA to a Roth IRA counts as a withdrawal and triggers taxes. Moving funds out of a 401(k) before age 59½ usually triggers a 10% penalty plus income tax.
What is the difference between a mutual fund's expense ratio and what the brokerage charges?
The expense ratio is a fee the fund company charges to manage the fund, taken automatically from the fund's value each year. The brokerage fee is what the firm holding your account charges you. Both come out of your money. A fund with a 0.5% expense ratio plus a brokerage with no trading fees costs less than a fund with a 1.5% expense ratio at a brokerage with $10 trading fees.
Do I need a lot of money to start investing in mutual funds?
No. Most online brokers let you start with $1 or $100 and buy fractional shares. Some funds have minimum investments of $1,000 or $2,500, but many do not. Check the fund's prospectus or the brokerage website to see the minimum. Starting small is better than waiting to save a large amount.
Is a 401(k) always better than a brokerage account for investing?
A 401(k) is better if your employer matches contributions, because that is assistance programs. It is also better if you want to reduce your taxable income this year. A brokerage account is better if you need access to the money before age 59½, if you want more fund choices, or if you have already maxed out your 401(k) contribution limit ($23,500 in 2024, but this changes yearly).
What should I look for when choosing a brokerage?
Look at account fees, trading fees, the number of mutual funds available, and whether the firm offers the specific funds you want. Check whether the website and app are easy to use. Read reviews about customer service. If you want advice, ask whether advisors are fiduciaries. Compare the total cost — a firm with no trading fees but high fund expense ratios may cost more than one with small trading fees and low-cost funds.