Most investors know Charles Schwab as a giant of the investment account space. It’s one of America’s greatest pioneers and providers of brokerage and retirement accounts—and it has been for decades.
But even if you don’t have a Schwab account, Schwab can still help you build your way to a comfortable retirement. That’s because it also offers some of the largest and most cost-efficient retirement funds in the game—funds you can buy through most account providers. These funds include actively managed and indexed mutual funds alike, and most of them are right at home in an individual retirement account (IRA).
Let me introduce you to a handful of these Schwab mutual funds—each of which is inexpensive, effective, and sport long-term investing objectives. These funds also make sense for many tax-advantaged plans, so you can also consider holding them not just in IRAs, but also HSAs or (when available) 401(k)s.
Disclaimer: This article does not constitute individualized investment advice. These securities appear for your consideration and not as personalized investment recommendations. Act at your own discretion.
What Should You Want in a Retirement Fund?
When investing your retirement savings, you need to consider a few critical factors.
To start, a robust retirement portfolio should provide diversification across various asset classes. This typically means stocks and bonds, though it can also mean alternative asset classes such as real estate or commodities. Diversifying your retirement portfolio across these asset classes can help defray your risk and smooth your returns.
Costs matter too. Every dollar spent on fees and expenses is a dollar no longer available to grow and compound over time, so keeping expenses cut to the bone is vital. Good news there: The best Schwab retirement funds will generally have some of the lowest fees and expenses in the business.
And don’t forget taxes. A taxable account, like a standard brokerage account, is better suited to take advantage of certain tax-advantaged investments, such as municipal bonds. For tax-advantaged accounts, such as IRAs, some of the best investments include bond funds and actively managed stock funds. (I’ll explain why when we get to those funds.)
Finally, you ideally want your retirement portfolio to produce regular dividend income. Stocks can regularly experience nasty corrections and bear markets, but a good income fund can provide for your living expenses without forcing you to sell at an inopportune time.
Related: Best Schwab Retirement Funds for a 401(k) Plan
What Types of Funds Are Available in IRAs?
You can think of an IRA as a tax-advantaged brokerage account, insofar as they’re typically self-directed and extremely flexible. In most IRAs, you can own just about any type of fund—mutual funds, exchange-traded funds (ETFs), and even closed-end funds (CEFs).
ETFs typically beat both mutual funds and CEFs on fees, sometimes by a considerable margin. But there are a few reasons to consider Schwab mutual funds in an IRA.
They’re cheap, for one. Schwab mutual funds typically offer very low fees—in many cases lower than even many ETFs with a similar strategy.
Also, some of Schwab’s mutual funds are actively managed, which as I mentioned above is more efficiently held within an IRA. And you very well might prefer to have a human manager overseeing certain strategies rather than buy a fund that simply follows an index.
Related: Best Schwab Funds to Hold in an HSA
What Is a Mutual Fund?
A mutual fund is an investment company that pools money from many investors to buy stocks, bonds or other securities. The investors get the benefits of professional management and certain economies of scale. A pool of potentially millions or even billions of dollars is large enough to diversify and might have access to investments that would be impractical for an individual investor to own.
Here’s an example: An investor wanting to mimic the S&P 500 Index (an index made up of 500 large, U.S.-listed companies) would generally have a hard time buying and managing a portfolio of 500 individual stocks, especially in the exact proportions of the S&P 500 Index. Another example: An investor wanting a diversified bond portfolio might have a hard time building one when individual bond issues can have minimum purchase sizes of thousands (or tens of thousands!) of dollars.
Equity funds or bond funds will generally be a far more practical solution.
To invest in a mutual fund, you’ll need to open an account with the fund sponsor or open an investment account with a broker that has a selling agreement in place with the fund sponsor. As a general rule, most large, popular mutual funds will be available at most brokers, so if you open any traditional investment account (like a brokerage or IRA), you’ll have access to most of the mutual funds you’d ever want to invest in.
Why Schwab?
Charles Schwab is a U.S.-based brokerage and banking company founded in 1971 as a traditional brokerage company and then as a discount brokerage service in 1974. It is headquartered in San Francisco, California, and operates primarily throughout the United States, but also has international operations.
The firm is the largest publicly traded investment services firm with more than $6 trillion in assets under management (AUM). Schwab offers a wide range of financial services, such as investment advice and management, trading services, financial planning, banking services, workplace and individual retirement plans, annuities, and more.
On the product side, Schwab features more than 100 different funds boasting more than $870 billion in AUM. Schwab’s funds feature no load or transaction fees—not really a concern in 401(k)s, but advantageous in other accounts, like IRAs and taxable brokerages—and below-industry-average expenses. Schwab offers actively managed funds run by seasoned teams, but it’s also one of the largest providers of indexed mutual funds.
In short: Schwab’s best mutual funds for retirement are generally going to be among your top options period, and they generally won’t make a dent in your wallet.
Related: The 24 Best ETFs to Buy for a Prosperous 2024
The Best Schwab Retirement Funds for an IRA in 2024
With all that out of the way, let’s dig into some of the best Schwab retirement funds to hold in an IRA that you might consider diving into this year.
1. Schwab Short-Term Bond Index Fund
- Style: U.S. short-term bond
- Assets under management: $1.5 billion
- Expense ratio: 0.06%, or 60¢ per year for every $1,000 invested
- SEC yield: 4.2%*
- Minimum initial investment: None
Bonds should be a core holding of just about any portfolio. They also happen to be one of the most tax-inefficient asset classes on earth because the bulk of their returns will generally come from interest paid, and interest income is taxed as ordinary income. If you’re in the 37% tax bracket, then you’re losing 37% of your bond interest to taxes.
For this reason, it will virtually always make sense to hold bonds and bond funds in a 401(k), IRA, HSA, or other tax-deferred account.
With the yield curve inverted as it is today (meaning that short-term rates are higher than long-term rates), it makes sense to keep a good chunk of your overall bond exposure in short-term bond funds.
One solid short-term bond option is the Schwab Short-Term Bond Index Fund (SWSBX). A little over two-thirds of the portfolio is invested in U.S. government securities, a quarter is in high-quality corporate short-term bonds, and the remaining sliver is in foreign government bonds.
One of the most critical metrics to consider when considering bond funds is duration, which is a measure of interest-rate sensitivity. As an example, a bond with a duration of 2 years would see its price rise by 2% if interest rates fell by 1% (or conversely, would see its price fall by 2% if interest rates rose by 1%). The actual calculation of duration is fairly complex; it’s the weighted average of the bond’s cash flows. But the key takeaway is that, all else equal, the longer a bond’s time to maturity, the higher its duration—and thus the higher the interest-rate risk. SWSBX has a duration of just 2.6 years, meaning its risk associated with rising interest rates is minimal.
If you’re looking for a low-stress addition to a retirement portfolio, SWSBX fits the bill.
* SEC yield reflects the interest earned across the most recent 30-day period. This is a standard measure for funds holding bonds and preferred stocks.
Want to learn more about SWSBX? Check out the Schwab provider site.
Related: 10 Best Fidelity Funds to Buy
2. Schwab US Aggregate Bond Index Fund
- Style: U.S. intermediate bond
- Assets under management: $5.1 billion
- Expense ratio: 0.04%, or 40¢ per year for every $1,000 invested
- SEC yield: 4.2%
- Minimum initial investment: None
For a more diversified option that covers a wider swath of the bond market, consider the Schwab US Aggregate Bond Index Fund (SWAGX).
The fund offers broad exposure to more than 8,000 U.S. government bonds, investment-grade corporate debt, and mortgage-backed securities (MBSes). Currently, 42% of the portfolio is invested in American government debt, 26% is invested in MBSes, and 24% is invested in corporate bonds, with the remainder invested in modest positions in foreign government debt and other investments.
SWAGX is diversified across the yield curve, with maturities ranging from less than a year to over 20 years. Overall, the fund has a duration of 6.2 years. So, the fund has moderate interest-rate risk. A rise in interest rates of 1% would mean a price decline of about 6%. But remember: This cuts both ways—a fall in interest rates could mean significant capital gains.
Want to learn more about SWAGX? Check out the Schwab provider site.
Related: 9 Best Fidelity Index Funds to Buy
3. Schwab Global Real Estate Fund
- Style: Global REIT
- Assets under management: $303.4 million
- Expense ratio: 0.75%, or $7.50 per year for every $1,000 invested
- Dividend yield: 3.3%
- Minimum initial investment: None
Real estate has been a preferred asset class since the dawn of human civilization. And today, real estate investment trusts (REITs) offer the potential for both high yield and respectable capital gains.
REITs enjoy a special tax status that allows them to avoid corporate taxation so long as they distribute at least 90% of their net profits as dividends. Because of this tax incentive, REITs tend to be one of the highest-yielding sectors and a perennial favorite among income investors.
Unfortunately, this also makes REITs very tax-inefficient, as a large percentage of the total return comes from taxable dividends. What’s more, REIT dividends are generally not classified as “qualified dividends.” Qualified dividends are taxed at the long-term capital gains rate (0%, 15% or 20% depending on your tax bracket). Non-qualified dividends are taxed as ordinary income, like bond interest, and can face rates as high as 37%, depending on your bracket. Thus, it makes more sense to hold REITs and REIT funds in a tax-advantaged fund like an IRA rather than a taxable brokerage account.
Schwab investors looking for real estate exposure could consider the Schwab Global Real Estate Fund (SWASX). The fund is a diversified REIT fund with a global presence. Approximately 60% of the fund is invested in American REITs, with most of the remainder allocated to Europe and Japan. SWASX also has smaller allocations to China, Singapore, Canada and Australia. The portfolio has minimal exposure to the office sector, which has been affected by work-from-home policies, and is most heavily allocated to industrial and logistics properties.
This is a growth-focused real estate fund that focuses on total return, including both capital gains and income. But its ~3% current yield is mighty competitive in a world in which the S&P 500 yields only 1.3%.
Another reason to consider SWASX for your retirement account? The fund generates a lot of short-term capital gains, as it has annual turnover of about 86%. All of that trading creates taxable income in a regular taxable brokerage account.
Want to learn more about SWASX? Check out the Schwab provider site.
Related: The 10 Best Vanguard Funds to Buy for the Everyday Investor
4. Schwab Select Large Cap Growth Fund
- Style: U.S. large-cap growth
- Assets under management: $2.3 billion
- Expense ratio: 0.75%, or $7.50 per year for every $1,000 invested
- Dividend yield: N/A
- Minimum initial investment: None
An old Wall Street maxim says “you never go broke taking a profit.” There is a lot of wisdom in that quote. As a general rule, buying and holding good stocks or good funds and allowing them to compound over years or even decades is the way to go. But having at least part of your portfolio in actively traded strategies can also make sense, particularly in bear markets. Actively traded strategies have their stretches when they outperform passive index strategies, and they can potentially help you to avoid major declines.
Unfortunately, active trading strategies are also woefully tax-inefficient, particularly if your holding period is less than a year. Short-term capital gains are taxed as ordinary income, meaning you could be sharing up to 37% of your gains with Uncle Sam.
So, it makes sense to hold funds that do a lot of active trading in a tax-deferred retirement account. There is no precise, universally accepted threshold for what constitutes “a lot” of active trading, but I would consider any fund with portfolio turnover (how much of the portfolio’s holdings are turned over, or replaced, in a given year) over 30% or so to be fairly tax-inefficient. The higher that number goes, the more inefficient the fund.
As an example, let’s look at the Schwab Select Large Cap Growth Fund (LGILX), which is sub-advised by American Century Investment Management and JP Morgan Investment Management. Being a growth fund, LGILX is heavy in technology stocks; it includes Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA) and most of the rest of the large-cap growth stocks you would expect to see.
But this high performance comes at the cost of a lot of active trading; the annual portfolio turnover is about 65%. In a taxable account, that’s a large potential tax liability.
So, LGILX is exactly the kind of actively managed fund best held in a retirement account like an IRA. The tax deferral neutralizes the negative impacts of active trading, allowing us to enjoy the full benefits of the trading gains.
Want to learn more about LGILX? Check out the Schwab provider site.
Related: 7 Best Schwab Funds to Buy
5. Schwab Dividend Equity Fund
- Style: U.S. large-cap dividend
- Assets under management: $533.0 million
- Expense ratio: 0.88%, or $8.80 per year for every $1,000 invested
- Dividend yield: 1.9%
- Minimum initial investment: None
Qualified dividends are taxed at the same lower rates as long-term capital gains. This is by design.
Dividends were previously taxed like bond interest, as ordinary income. But following the tech bust of 2000-02, the Bush administration changed the tax laws in an attempt to encourage more responsible behavior from both investors and the companies they invest in. The thinking was that lowering the tax on dividends would encourage more companies to pay dividends and encourage more investors to take a long-term investor mindset as opposed to a short-term gambler mindset.
It was a godsend for income investors, but let’s be clear: Dividend stocks are still woefully tax-inefficient. Long-term capital gains remain unrealized—and thus not taxable—until you sell, whereas dividends are still taxed when they are received … even if at a lower rate than in decades past.
For this reason, it’s generally going to make sense to keep dividend stocks and dividend funds in a tax-deferred retirement account. And one worthy contender is the Schwab Dividend Equity Fund (SWDSX).
SWDSX includes some traditional high yielders among its largest holdings, including Big Oil dominators Exxon Mobil (XOM) and Chevron (CVX). But while the fund might have a dividend focus, that doesn’t mean that it’s a stodgy widows-and-orphans investment. SWDSX is full of quality blue-chip stocks with a history of consistently paying dividends, including growth names like Microsoft, which is the fund’s third-largest holding.
If you’re looking for a good collection of dividend-paying workhorses that you can own for the long term, SWDSX is a worthy addition to your retirement portfolio.
Want to learn more about SWDSX? Check out the Schwab provider site.
Related: 7 Best Schwab Index Funds to Buy
6. Schwab Small-Cap Equity Fund
- Style: U.S. small-cap equity
- Assets under management: $608.2 million
- Expense ratio: 1.09%, or $10.90 per year for every $1,000 invested
- Dividend yield: 0.3%
- Minimum initial investment: None
Actively managed funds will almost always have significantly higher turnover than passive index funds, meaning they potentially create more taxable capital gains. And this is often even more true in the world of small-cap equities. Because smaller companies are often younger companies, the small-cap space tends to move quickly. Successful companies “graduate” to mid- or even large-cap status, and those that are unsuccessful often disappear altogether.
So, if actively managed funds in general are best held in a tax-deferred account, this would be even truer for actively managed small-cap funds.
As an example, let’s take a look at the Schwab Small Cap Equity Fund (SWSCX). This actively managed fund has a turnover rate of about 43%, meaning about half of the portfolio holdings change in any given year.
Small-cap stocks have lagged their large-cap peers in recent years, as the market has been dominated by the “Magnificent Seven” mega-cap stocks. Still, SWSCX has managed to return an annualized 10.1% since inception, and that’s not too shabby.
Want to learn more about SWSCX? Check out the Schwab provider site.
Related: 10 Best Vanguard Index Funds to Buy
7. Schwab Target-Date Funds
- Style: Target-date
- Expense ratio: Schwab Target Funds: 0.26%-0.59%, or $2.60-$5.90 per year for every $1,000 invested; Schwab Target Index Funds: 0.08%, or 80¢ per year for every $1,000 invested
- Minimum initial investment: None
One of the challenges in retirement planning is getting the asset allocation right, or having an asset class mix that is appropriate for an investor at your age and stage of life. An ideal portfolio for a 20-year-old is likely going to be very different from that of a 40-year-old, and both those portfolios will be different from what’s ideal for a 60-year-old.
That’s where target-date funds can really add value.
Target-date funds—also called life-cycle funds—are a type of mutual fund that are designed to change their asset allocation over time. Target-date funds start out invested heavily in stocks, then slowly reduce their stock exposure and replace it with bond exposure as they approach their target retirement date, following a glide path.
The target retirement dates are intended to be estimates; they don’t have to be super precise. Generally, most mutual fund families will create target-date funds in five-year increments (say, 2025, 2030, 2035, etc.).
Given the hyper-specific focus on retirement, target-date funds are a mainstay of 401(k) plans. But considering that these are funds you’ll want to buy and hold for a long time, and also given that down the road, there’ll be a much heavier income component, you can do well to also hold target-date funds in an IRA.
Schwab offers two target-date fund series:
- Schwab Target Funds: These hold a collection of actively managed and index funds. While most of Schwab Target Funds’ holdings are other Schwab mutual funds, they will also hold funds from outside providers, including Dodge & Cox and Baird.
- Schwab Target Index Funds: These hold Schwab ETFs exclusively.
In general, Schwab’s target-date funds are economical, though the Schwab Target Index Funds are flat-out cheap, at just 0.08% in annual expenses. All of Schwab’s target-date products hold a combination of U.S. and international stocks and bonds.
Want to learn more about Schwab’s target-date funds? Check out the Schwab provider site.
Related: 7 Best T. Rowe Price Funds to Buy
How Does Your Portfolio Look? Ask Empower
More than 3 million users are putting their retirement on track by putting Empower’s tools and/or advisory services to work for them.
Wondering how your portfolio is shaping up? Sign up with Empower to use its free Investment Checkup tool, which can help you assess your portfolio risk, analyze past performance, and get a target allocation for your portfolio. You can even compare your portfolio to both the S&P 500 and Empower’s “Smart Weighting” Recommendation.
And if you want a fuller advisory experience? Empower’s full-service Wealth Management account pairs the firm’s tools with skilled human management. Empower will create a recommended portfolio spanning six asset classes, then help you implement your plans by giving you access to financial advisors who can guide you through retirement planning, college savings, workplace stock options, and more.
Regardless of how much money you bring to the table, if you sign up, you will be given the option to schedule an initial 30-minute financial consultation with an Empower advisor.
- Empower (formerly Personal Capital) offers both a free set of portfolio, net worth, and cash flow tracking tools, as well as paid asset management service.
- Link Empower to your bank and investing accounts, credit cards, and more to see a single view of useful information and data, including your net worth.
- Empower Wealth Management offers unlimited advice and retirement planning help, as well as managed ETF portfolios, for accounts with between $100,000 and $250,000 in assets. Higher asset tiers include access to dedicated financial advisors, retirement specialists, and more investment options (including stocks, options, real estate, and private equity).
- Free portfolio tracker
- Free net worth, cash flow, and investment reporting tools
- Dedicated investment advisor
- Free tax-loss harvesting
- Dividend reinvestment
- Automatic rebalancing
- 5-day-a-week live customer support, 24/7 email support
- High minimum for investment management ($100k)
- High investment management fee (0.89% AUM)
Schwab Retirement Funds for IRAs: Frequently Asked Questions (FAQs)
What is the minimum investment amount on Schwab mutual funds?
Schwab is one of the most friendly fund companies for beginners. That’s not just because both its mutual funds and ETFs sport below-industry-average expense ratios, but because you don’t need much money to invest in them in the first place. Most Schwab mutual funds have the barest of investment bare minimums—you can literally start with as little as $1.
That’s extremely beneficial in self-directed accounts like an IRA. Many mutual funds from other providers require high minimums in the thousands of dollars, hamstringing investors with little capital to work with.
Related: 5 Best Fidelity Retirement Funds to Hold in an IRA
What are index funds?
There are two kinds of funds: actively managed funds and index funds.
With an actively managed fund, one or more managers are in charge of selecting all of the fund’s holdings. They’ll likely have a specific strategy to adhere to, and they’ll be tasked with beating a benchmark index, but they’ll be given a lot of discretion about how to achieve that. These managers will identify opportunities, conduct research, and ultimately buy and sell a fund’s stocks, bonds, commodities, and so on.
An index fund, on the other hand, is effectively run by algorithm. The fund will attempt to track an index, which is just a group of assets that are selected by a series of rules. The S&P 500 and Dow Jones Industrial Average? Those are indexes with their own selection rules. Index funds that track these indexes will generally hold the same stocks, in the same proportions, giving you equal exposure and performance (minus fees) to those indexes.
If you guessed that it’s more expensive to pay a conference room full of fund managers than it is a computer that tracks an index, you’d be right. That’s why actively managed funds tend to cost much more in fees than index funds.
And that’s why ETFs are generally cheaper. Most (but not all) mutual funds are actively managed, while most (but not all) ETFs are index funds.
Related: 5 Best Vanguard Retirement Funds to Hold in an IRA
What is an exchange-traded fund?
Exchange-traded funds are actually very similar to mutual funds but feature a handful of significant differences that may make them superior in certain situations.
Like traditional index mutual funds, an ETF will hold a basket of stocks, bonds and other securities. These can be broad and benchmarked to a major index like the S&P 500, or they can be exceptionally narrow and focus on a specific sector or even a specific trading strategy. For the most part, anything that can be held in an exchange-traded fund can also be held in a mutual fund.
However, unlike mutual funds, ETFs trade on major exchanges—such as the New York Stock Exchange or Nasdaq—like a stock. If you want to buy shares, you don’t send the manager money; you just buy shares from another investor on the open market.
The need to buy shares can be problematic when dollar-cost averaging. As an example, let’s say you have exactly $100 to invest, but the shares of the ETF trade for $65. You can only buy one share, and you’re stuck with $35 in cash uninvested.
But ETFs have their own advantages. For one, they have intraday liquidity—that is, if you want to buy or sell in the middle of the trading day (or multiple times throughout the trading day), you can.
The second advantage is tax efficiency. In a traditional mutual fund, redemptions by investors can generate selling by the manager that creates taxable capital gains for the remaining investors who didn’t sell. This doesn’t happen with ETFs, as the manager isn’t forced to buy or sell anything when an investor sells their shares.
Like we said, many investors use “ETF” and “index fund” interchangeably. That’s because most exchange-traded funds are index funds—but not all. Some are actively managed.
As is the case with Schwab mutual index funds, Schwab ETFs—most of which are indexed—tend to have some of the lowest costs in the business in terms of fees and expenses.
Why does a fund’s expense ratio matter so much?
Every dollar you pay in expenses is a dollar that comes directly out of your returns. So, it is absolutely in your best interests to keep your expense ratios to an absolute minimum.
The expense ratio is the percentage of your investment lost each year to management fees, trading expenses and other fund expenses. Because index funds are passively managed and don’t have large staffs of portfolio managers and analysts to pay, they tend to have some of the lowest expense ratios of all mutual funds.
This matters because every dollar not lost to expenses is a dollar that is available to grow and compound. And over an investing lifetime, even a half a percent can have a huge impact. If you invest just $1,000 in a fund generating 5% per year after fees, over a 30-year horizon, it will grow to $4,116. However, if you invested $1,000 in the same fund, but it had an additional 50 basis points in fees (so it only generated 4.5% per year in returns), it would grow to only $3,584 over the same period.
