Understanding Your IRA Investment Options

October 12, 2021

Is it just us, or do retirement accounts sometimes feel like alphabet soup? IRAs? 403(b)s? 401(k)s (not to be confused with SIMPLE 401(k)s)?

If you don’t know your SARSEP from your elbow, no worries. We’ve got you covered.

Here, we’re taking a look at one of the most common retirement plans: the IRA. Let’s break down your IRA investment options.

What is an IRA?

An individual retirement account, or IRA, is a type of tax-advantaged account that allows individuals to save and invest for retirement (thus the highly descriptive name).

This account can include a wide variety of investment assets, including:

  • Stocks
  • Bonds
  • Savings accounts
  • Certificates of deposit
  • Mutual funds
  • Exchange-traded funds
  • Precious metals
  • Real estate
  • REITs
  • Penny stocks
  • Gold-mining shares
  • Limited-risk futures and options
  • Mortgages
  • Mortgage-backed securities
  • Private companies
  • Limited liability companies
  • Partnerships
  • Unit investment trusts
  • Energy ventures
  • Tax liens
  • Commercial loans
  • Junk bonds
  • Foreign currencies
  • Warrants

In short, there’s a whole wide world of options out there for your IRA (with certain limits, of course—you can’t hold life insurance policies or collectibles like art or antiques).

How IRAs Work

So, how does an IRA actually work?

Like other investment accounts for retirement, IRAs are tax advantaged. What separates various types of retirement accounts is how they’re tax advantaged. The nice thing about IRAs is that the different types of IRAs each offer their own form of tax advantage depending on what matters to you.

Generally, though, your current income and whether you already have an investment account both influence what IRAs you qualify for. IRAs also come with an early withdrawal penalty of 10% if you withdraw before the age of 59.5 unless you qualify for an exception. Depending on the type of IRA you have, you might also have to pay income tax on that early withdrawal.

Types of IRA

The two most common types of IRAs are traditional and Roth IRAs, though there are seven types of IRAs for investors to choose from:

  1. Traditional IRA
  2. Roth IRA
  3. SEP IRA
  4. Nondeductible IRA
  5. Spousal IRA
  7. Self-directed IRA (available in traditional and Roth flavors)

A traditional IRA is a type of IRA that allows you to direct pre-tax money into a retirement account to grow tax-deferred. You don’t pay dividends or capital gains tax until you make a withdrawal. Pay careful attention to the word deferred, though, because it’s important—since many retirees are in a lower tax bracket than when they were working, their taxes will likely be lower.

A Roth IRA is also tax-advantaged, but in a different way. With a Roth, you can make tax-free withdrawals on the account as long as you meet certain conditions. You make contributions with money that you’ve already paid taxes on. These are the best choice if you think your taxes will be higher in retirement than they are right now. Keep in mind, however, that there are income limits—you can’t earn more than $140,000 as a single person or more than $208,000 as a couple to qualify for one.

Why Invest in IRAs?

The key benefit of IRAs is that you have far greater options than you would get from the typical employer 401(k) plan. While IRAs have a maximum contribution amount, you have much more diverse options to actually meet that number, and your investments grow tax-free in the meantime.

That way, you have a much better chance of earning the retirement savings you actually need to afford the golden years by the time the golden years come knocking.

Which IRA Investment Options are Right for You?

To figure out which IRA investment option is right for you, your best bet is to think about income and taxes.

With a traditional IRA, you pay taxes when you make withdrawals during retirement. With a Roth IRA, your contributions aren’t tax-deductible, but your withdrawals are tax-free. Traditional IRA accounts are a better choice for those who will likely earn less in retirement, while Roth IRAs are better for those who think their taxes will be higher in retirement than they are now.

Then there’s the income question. There aren’t income restrictions for traditional IRAs, but the question of whether or not your contributions are tax-deductible depends on your income bracket. Roth IRAs have maximum income limits.

Making Your Investments Go Farther

Listen, we get it. Saving for retirement is tricky. There’s a lot of decisions to be made based on future information you may not have. But regardless of where you are with investing, one thing is for sure: you need the right mix of assets to ensure your portfolio can perform well, no matter what surprises the market (or life) might throw your way.

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