Individual Retirement Accounts (IRAs) are a great way to save money for retirement. The main reason these types of accounts are vital for your nest egg is because they offer tax advantages. In this article, we will briefly discuss these tax benefits. We will also detail the investments you can hold in an IRA.
Types of IRAs
There are several different types of IRAs. These include a traditional IRA, a Roth IRA (RIRA), as well as a backdoor and SEP IRA. Below is a high level overview of the differences of the main types (IRA and RIRA). Here is more information regarding the differences between individual retirement accounts.
A traditional IRA is an individual retirement account that allows your earnings to grow tax deferred. With a traditional IRA, you can deposit pre-taxed dollars. You won’t pay taxes on investment income (interest and dividends) or capital gains until you make a distribution once you retire. When you do withdrawal, you are taxed at your ordinary income tax rate.
Contributions to a Roth IRA are made with post-taxed dollars. However the earnings in a Roth IRA can grow tax free. The tax benefit of a Roth IRA comes in retirement in the form of tax free distributions. Additionally, since contributions to a Roth IRA are after tax contributions the taxpayers can withdraw their contributions, not the earnings, tax free and penalty free.
What investments can you hold in an IRA?
Now that you have a better understanding of the differences between the different types of IRAs, we can answer the questions of what investments can you hold in an IRA? Well the simple answer is that there is a lot.
In your IRA, you can hold assets such as:
- Mutual Funds
- Exchange traded funds (ETF)
- Real estate
You are also allowed to hold some precious metals and even cryptocurrencies. If you have more questions regarding holding these less traditional investments in your IRA, be sure to check with your accountant or financial advisor. These types of assets can be great hedges against inflation.
Prohibited Investments in an IRA
Not all assets can be investments in an IRA. This is why before you purchase an asset or security in your self-directed IRA you should check with your financial advisor.
Some of the assets and securities you cannot hold in your IRA include:
- Antiques and collectables like artwork, stamps, wine, or cars
- Life insurance policies
- Some derivative products that have undefined risk
- Real estate for personal use
- Gold coins with the exception of a few
While you are allowed to hold real estate in your IRA, you cannot hold real estate for personal use. For instance, you cannot have your IRA own a piece of real estate that you are living in.
Investments You Can Hold In an IRA – Summary
There are many types of investments you can hold in an IRA. It doesn’t really matter what type of IRA you have (traditional, Roth, etc.) – you can hold a ton of different investments. The most popular are stocks, bonds, and mutual funds. But don’t forget you can hold some real assets like real estate and some gold coins.