Know Your IRA Investment Options

October 12, 2021

Opening your IRA is the first step. Next, you have to invest those assets, but you have to know your IRA investment options. Here’s a look at what assets you can put in an IRA and how new investors should approach investing with the account.

For those who don’t have a 401(k) plan, or for those who want to make the most of their potential retirement savings, an IRA is their best friend. The problem is that many investors make the same mistake: they dump money in an IRA and don’t do anything with it.

While opening an IRA is an excellent investment in your future, it’s just the first step. An IRA is basically a box you can fill with assets, and because those assets are in a tax-advantaged IRA, you reap the tax benefits. You just have to know your IRA investment options—and learn how to invest smartly.

With that in mind, here’s a look at what assets you can put in an IRA and how new investors should approach investing with the account.

What is an IRA?

An individual retirement account, or IRA, is a tax-advantaged investment account designed to help you save for retirement. It can hold retirement contributions from multiple sources, including your individual contributions, contributions from your employer, and even other assets.

Types of IRA

The nice thing about an IRA is that you have choices. There are seven types of IRA:

  1. Traditional
  2. Roth
  3. SEP
  4. Nondeductible
  5. Spousal
  7. Self-directed

Most of the time, people choose between a traditional IRA and a Roth IRA.

A traditional IRA gives you an upfront tax break and the money in the account is not taxed until you make withdrawals in retirement, which is helpful if you think you’ll earn less in retirement. A Roth IRA is the reverse—contributions are not tax deductible, but withdrawals are completely tax free whether you make them in retirement or not, which is great for those who will be in a higher income bracket in retirement or those who might need early liquidity.

Allowed Investments

Here’s the good news: regardless of IRA type, almost any type of investment can be housed within an IRA. These include things like:

  • Stocks
  • Bonds
  • Annuities
  • Mutual funds
  • Exchange-traded funds (ETFs)
  • Unit investment trusts (UITs)
  • Real estate

However, there are some investments that cannot be housed in an IRA (not to be confused with prohibited transactions). Some investment vehicles that are not allowed in an IRA include:

  • Life insurance
  • Antiques
  • Collectibles
  • Artwork
  • Real estate for personal use
  • Derivative trade positions

These disallowed items are based on a mix of practicality and history. Derivative trade positions, for example, are considered highly risky, and the use of speculative instruments is counter to retirement security. Artwork, on the other hand, was disallowed in the 1970s when the IRS discovered that some account holders were using IRA protection to shelter artwork stolen in the Nazi era, and the IRS didn’t want to provide a vehicle that would shelter stolen artwork from being reclaimed by its rightful owners.

Understand Asset Allocation

Aside from a short list of disallowed investment vehicles and assets, the Tax Code is pretty forgiving. In fact, it doesn’t state the types of investments allowed, though it explicitly states investments that are not allowed.

The easiest way to think about it is to think of your IRA as an account with tax features. Those tax features have very little impact on the assets within the account. Because of this, the IRA is basically just a container for investment vehicles and assets. Pretty much any mainstream investment vehicle is acceptable.

For this reason, it’s important to think about asset allocation.

Don’t let the phrase scare you. Asset allocation is simply balancing your portfolio across various investments based on your unique combination of goals, risk appetite, and investment horizon. In other words, you have to think about how you distribute your investment money across various investment vehicles.

As in any other type of investment, diversification is the name of the game. In context of an IRA, this typically means maintaining a mix of various conventional assets so that you have the right mix of growth and security.

For example, let’s say you have $10,000 in an IRA. $6,000 of that money is in stocks, while the remaining $4,000 is in bonds. That means your asset allocation is 60/40. The trick is to balance growing (but risky) assets like stocks with safer, fixed-income investments like bonds so that you have insulation even if your growth strategies don’t pan out.

Things to Keep in Mind

So, to summarize your general IRA investment strategy, you can invest in a wide variety of investment vehicles through your IRA, and the best way to invest smartly is to achieve a mix of growth and security assets.

Unfortunately, it’s hard to get more specific. What that means in your unique case is based on three things:

  1. Investor type
  2. Risk appetite
  3. Timeline

This means that while two IRAs might have wildly different strategies, they can both be successful for their unique investor. Let’s break it down.

Investor Type

The most important thing to know in investing isn’t the market. You need to know yourself. After all, there is no right way to invest, just the right way for you.

To figure out what kind of investor you are, think about what you’re trying to achieve and how you tend to approach it. Broadly speaking, there are two types of investors: active and passive. Active investors are hands-on, trying to work the market to achieve growth. Passive investors are hands-off.

Keep in mind that you may start as one type and end as another. That’s perfectly okay. In fact, you should change investor types as you age—as you near retirement, you should shift from focusing on growth to focusing on capital preservation, which basically means you become more risk-averse over time to ensure that you have the money you need when it’s time to retire.

Risk Appetite

This brings us to the question of risk appetite. From low risk to high risk, the investing risk types are:

  • Conservative
  • Moderately conservative
  • Moderately aggressive
  • Aggressive
  • Highly aggressive

This is based on two things: your preferences and your age. The best type of investing is the one you do often, so if you’re not comfortable with risky investments, you’re better off taking a conservative approach knowing that you’ll consistently invest. However, even if you prefer aggressive techniques, you should taper into conservative ones as you get closer to retirement to ensure you have sufficient assets.


Last but not least is your timeline, which is always a careful balancing act of your comfort level against your time horizon.

Basically, if you invest too conservatively too young, your investments may not keep up with inflation. On the other hand, if you invest too aggressively when you’re older, you may erode your assets without enough time to recoup the loss.

The gist of it is this: invest more aggressively when you’re young, whatever that means to you, and get more conservative as you age. The longer timeline you have, the more time you have to recover losses.

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