Opening an IRA is a great first step in retirement planning but it’s not enough. You have to actually do something with that money. The great thing about IRAs is that they offer a huge variety of investment options. The trick is figuring out which ones are right for you.
Here’s what you need to know:
What Is An IRA?
An Individual Retirement Account (IRA) is a type of account that is designed to help you save for retirement on a tax-free or tax-deferred basis. There are several different types of IRAs, and each offers different advantages.
- Traditional IRA – you make contributions that may be deductible on your income tax return in the year they were made however, distributions are taxed later
- Rollover IRA – a traditional IRA funded with money “rolled over” from another qualified plan, such as a 401(k)
- Roth IRA – contributions are made after taxes, but withdraws are tax-free after retirement
What Are My Investment Options?
IRAs are not limited to a narrow selection of investment options like many other retirement accounts. In fact, in most IRA accounts, you can hold stocks, options, annuities, mutual funds, and even real estate.
But there are a few limitations. Life insurance, antiques/collectibles, real estate for personal use, and coins are all forbidden.
In addition, derivative positions with undefined risk are also banned (and many IRA custodians will not allow them no matter what).
How Do I Know What’s Right For Me?
Choosing the right investments for your own account can be tricky, especially if you don’t have a background in finance.
Here’s what you should consider:
- Do I want to manage my own account or use a professional?
- How much risk am I willing to take?
- How much time can I spend managing my portfolio?
- How soon will I need my money?
With the answers to those questions in hand and a little bit of research, investing can be easy!