Own Your Retirement: Choosing Your IRA Investments

In my last two posts, I broke down two of the most popular ways to save for retirement by exploring both traditional IRAs and Roth IRAs. But once you choose the type of IRA you want, you’re not quite done. You still have to select your IRA investments within that account.

Choosing your IRA investments can feel overwhelming, but it doesn’t have to be. Let’s take a look at some of the most common options.

Understanding IRA Investments

First, let’s clear up a point of confusion about IRAs. Whether you choose a traditional IRA or a Roth IRA, think of that account as an umbrella. Inside your IRA, you can choose to invest your money in many different ways. For example, you could choose a mutual fund of stocks, some treasury bonds, and some cash in US dollars. Each of these items is like a box that sits under the umbrella of your IRA. You will contribute money to your IRA and then choose how that money is allocated — that is, which boxes you want to put contributions into.

IRA Investment Options

As discussed in previous posts, there are plenty of rules when it comes to investing in IRAs. You can choose from a wide range of investment vehicles within your IRA account, but there are some things you can’t invest in. Here are some of the most popular choices:

  • Stocks: You can buy individual stocks from different companies, whether they’re in the US or around the world.
  • Bonds: You can buy individual bonds as well. Bonds are a way to invest in governments, so you can choose federal treasury bonds, or Treasury Inflation-Protected Securities (TIPS). Municipal bonds are another choice, but these already come with tax benefits so won’t benefit from a tax-advantaged IRA.
  • Mutual Funds: Mutual funds are pools of money from many investors that are invested in groups of stocks or bonds. When you invest in one mutual fund, you own a small piece of many stocks, making this a great way to diversify your investments and let someone else manage the trading.
  • CDs: Bank CDs (certificates of deposit) are a safe, stable way to get a guaranteed return on your investment. The interest rates are often low, but you won’t lose money because CDs are FDIC-insured.
  • REITs: A Real Estate Investment Trust lets you invest in commercial real estate without having to buy a specific building. These investments work a bit like a mutual fund for property instead of stocks.

Tips for a Balanced IRA

With so many choices, how do you decide which investments to add to your IRA? In general, you want to have a balance between risky and safe investments. The rule of thumb is to subtract your age from 100. That number is the percentage of your portfolio that can be placed in risky investments, while your age is the percentage that should be in safe investments.

So what are risky investments? Stocks, stock mutual funds, and REITs fluctuate broadly, so they are best for long-term holdings. When you’re young, you have time to bounce back from market dips well before your retirement date.

Safer investments include bonds, bond mutual funds, and CDs. As you get closer to retirement, it makes sense to increase your investments in these to protect your IRA from losses in market downturns.

The Bottom Line

When it comes to building your financial independence, investing for your retirement is a top priority. Opening an IRA is a great way to start saving, and most brokerages make it easy to choose a well-rounded selection of investments based on your age. The most important thing is just to get started! The sooner you invest, the sooner you can start to build that solid next egg.

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