Individual Retirement Accounts (IRAs) have long been an integral component of American’s retirement savings strategies, created under ERISA in 1974 as tax benefits to encourage individuals to save for their golden years. Unfortunately, not all investments qualify or allowable within an IRA – this guide outlines which ones do and ensure your nest egg complies with IRS rules and is ready when retirement arrives!
Traditional and Roth IRA Accounts.
Before discussing approved investments, it’s essential to distinguish between Traditional and Roth IRAs – their main distinction lies in tax treatment – while both provide access to similar investment choices.
Individual Stocks as an Investment for Your IRA Stocks: Arguably the most widely known form of investment, individual stocks represent part ownership in a company and offer significant potential returns while at the same time bearing certain market risks.
Bonds: From corporate, municipal and government Treasury bonds – this debt security can provide reliable source of fixed income with lower risk but potentially lower potential returns than stocks.
Mutual Funds: Mutual funds combine funds from multiple investors into one pool in order to purchase a diverse portfolio of stocks, bonds or other assets managed by professionals – an easy and convenient way for individuals to achieve diversification.
Exchange-Traded Funds (ETFs): Exchange-traded funds, or ETFs, operate like mutual funds by pooling assets but trading like stocks on stock exchanges – providing investors with all of the characteristics associated with both.
Real Estate Investment Trusts (REITs): REITs are companies that own or finance income-producing real estate properties and allow individuals to invest in this sector without actually owning property themselves.
Certificates of Deposit (CDs): Banks offer Certificates of Deposit as time deposits with fixed maturity dates that provide a stable interest rate while being FDIC insured, making these investments low risk and safe investments.
Money Market Funds: Money market funds are mutual funds that specialize in short-term debt securities and therefore have low risk profiles, providing steady value over the short-term.
Options and Futures Contracts: Advanced investors might consider options and futures contracts as viable investment instruments; however, such contracts entail considerable risks, making them unsuitable for all investors.
Annuities: Annuities may provide you with an assured source of income in retirement; however, they often come with high fees and surrender charges that must be considered carefully before purchasing one.
Prohibited Investments within an IRA
The IRS prohibits certain investments within IRAs:
Collectibles: Collectible items include art, rugs, antiques and metal (except certain bullion), gems stamps coins (excluding certain U.S. coins ) as well as alcohol beverages.
Life Insurance: With few exceptions, life insurance contracts cannot generally be held within an IRA account.
Tangible Personal Property: Tangible personal property refers to physical assets that do not fall into the collectibles category but nonetheless cannot be held within an IRA account.
Certain Derivatives: Not all options and futures contracts can be legally settled by physically delivering an asset; such contracts would fall outside this category and would therefore not be allowed.
Self-Directed Individual Retirement Account (SDIRA).
Self-Directed Individual Retirement Accounts deserve particular recognition. In contrast to traditional or Roth IRAs administered by brokerage firms or banks, SDIRAs allow investors to invest in more speculative forms like real estate and private placements – even certain precious metals such as gold. But responsibility lies with each account holder for adhering to IRS rules when managing investments through such accounts.
Conclusion
Individual Retirement Arrangements provide many investment options, yet it’s crucial that investors remain familiar with their rules in order to avoid tax implications and penalties. Always consult a financial advisor or tax professional when making investment decisions for an IRA and ensure your savings grow within the parameters established by the IRS for worry-free retirement savings growth.
