Last updated on September 16th, 2022 at 11:30 am
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Trading stocks on Robinhood is often a breeze, but they don’t allow you to trade mutual funds or bonds. This issue leads many investors to wonder if the popular brokerage firm lets people purchase and sell index funds.
Choosing the correct funds from the best firms can make a world of difference.
Robinhood has index funds that are very easy to research, buy, and sell. Head to the search bar and type in the word ‘Index Fund’ to find a list of available options. You can also purchase ETF index funds such as SPY, QQQ, etc. just like you would a regular stock.
Each index fund will show you its earnings, predicted earnings down the road, profit, expert suggestions, and more.
In this article, I will discuss the process of investing in index funds on Robinhood, how you can know which funds are worth your time and money, and all of the necessary tax information to keep up with the IRS’s demands.
How to Invest in Index Funds on Robinhood
To invest in index funds on Robinhood, you need to find the fund you’re searching for in the search bar, choose to buy it, and research the long-term potential gains and losses. Index funds are designed for long-term investments, not day trading or short-term strategies.
You should also make sure that the funds you’re buying are well-known and trusted.
Here’s a detailed method to invest in index funds properly:
- Type ‘Index Funds’ in Robinhood’s search bar (this step works on the app or the website). You can also look through Robinhood’s popular index funds to find out what people are investing in and to know if they’ve been profitable. There are countless websites that you can use to look up ETFs (exchange traded funds) to see which ones you want to trade.
- Look through all of the index funds and research their information. There’s a lot to consider when getting an index fund, especially since they’re designed to be long-term investments. I will cover some of the most important details in the following section.
- Choose your favorite index funds and decide how much money you want to invest in them. Medium explains you can create your own index using a chunk of other index funds or stocks you want to invest in for the long run. This tool is only advisable if you’re well-versed in the ways of the stock market.
- Decide if you want to hold onto them for long-term tax benefits and growth. Short-term investments are better for non-index fund stocks because they’re a bit more volatile. You can ride the lows until they go high, but well-known index funds usually grow reliably slow and steady.
How to Know Which Index Funds Are Good on Robinhood
To know which funds are good on Robinhood, check their earnings reports, how much they’ve profited, future plans of the companies or sectors in the index, and competitors. You can place index funds on a watchlist to see their trajectory and know if they’re worth investing in.
Robinhood offers a trending index fund layout to find out which ones are the most popular and profitable.
Keep these tips in mind before choosing index funds on Robinhood:
- Research the index fund’s earnings and profitability. These two indicators show you if the companies are reliable and continue to make money. If a company can’t profit, it might increase its prices and potentially decrease its customer base.
- Check the 52-week high and low prices. These indicators will show you if the index fund is volatile or reliable. Some low volatility index funds remain within a few dollars of the lowest or highest 52-week price, but they can still fluctuate quite a bit during recessions or unpredictable economic downturns. Check their five-year highs and lows if necessary.
- Review popular websites to know what the experts are saying about it (they usually rate funds as a Sell, Hold, or Buy). For example, Zack’s is a very well-known website full of financial experts and reliable advice. You can check their index fund recommendations to know where you should start.
- Look for dividends and decide if you want them reinvested or put into your Robinhood account. Some index funds provide annual dividends that pay you a portion of money based on your investment costs and the company’s performance. You can have them automatically reinvested into the fund to prevent taxation.
- The P/E ratio is a crucial indicator of a company’s investment performance and worthiness. Young and the Invested shows that the P/E ratio details whether or not a company is worth investing in by dividing the share price by its earnings per share. A decent P/E ratio ranges from 13 to 15.
How Much Does Robinhood Tax on Index Funds?
Robinhood does not withhold taxes on stocks but you will owe the government between 0% to 15% on long-term index fund investments and your usual income tax rate for anything held for a short time. Long-term investments are anything over a year, while short-term investments are less than a year.
The lower your taxable income, the lower your long-term index fund taxes will be when you sell them.
Robinhood isn’t allowed to set its own index fund tax rates because all brokerage firms report to the IRS. Your index funds aren’t taxed until you sell them, regardless of how much you profit.
Holding your funds for more than a year will yield the lowest tax rates (as of right now) and will likely provide better profits.
According to Investopedia, it’s best to leave your index funds invested until you’re ready to remove the money and put it into another index fund or your bank account. Selling the funds too often can skyrocket the tax rates to the same as your taxable income, potentially double or triple of what it could’ve been for long-term investments.
The same rules apply if you create your own index fund. None of them are taxed until you sell them. If you lose money rather than profit, you can write the losses off in your taxes.
I would suggest filing through a tax professional to write off as much of the financial losses as possible.
Investing in Robinhood’s available index funds is quite easy. You can use these funds to create a retirement plan, but it’s not the same as an IRA or 401k mutual fund account that you’ll find from other brokerage firms.
Instead, Robinhood’s stocks are taxed at the labeled long-term or short-term tax rates since they don’t offer tax deferred accounts.