If you have just opened your first IRA, then congratulations! You have just taken an important step toward securing your financial future. An IRA (which stands for “individual retirement account”) is merely a vehicle that facilitates retirement savings with favorable tax treatment. If you are doing a self-directed IRA, then you most likely still need to select the individual investments that will compose your IRA’s portfolio. Some investments are better than others, and this article will examine some of the best investment options for your first IRA.
Stocks represent an ownership stake in a company. There is a risk of losing money with stocks, but they also present a higher potential for gains than most other investments. If you’re up for doing your own research, you can pick individual companies to invest in, buying and selling your shares with the goal of turning a profit. One of the great things about trading stocks in an IRA is that the taxes on gains are deferred until the money is withdrawn, so even if you trade actively, you won’t see a tax bill for years or even decades.
For more conservative investors, bonds are a popular choice. Bonds are issued by governments and corporations in order to raise capital, and by buying a bond, you are loaning money to the issuer. Bonds typically pay interest semiannually, and the principal (the amount invested) is repaid once the bond matures. Bonds prices are typically less volatile than stock prices. The riskiness of a bond can be determined by its rating, with U.S. government-issued bonds being considered the safest, and high-yield or “junk” bonds being the most likely to be defaulted on.
Mutual Funds & Exchange-traded Funds
For an easy, turnkey approach to investing, mutual funds and exchange-traded funds (ETFs) are a great choice for a first IRA. These types of funds invest in a pool of securities, allowing the investor to easily diversify their holdings without having to buy a bunch of individual stocks and bonds.
Fund portfolios are managed professionally by a fund manager with the goal of carrying out the fund’s objective. The objective can be the growth of capital, income, or something else, with varying levels of risk. A fund can even hold multiple asset classes – for instance, a fund could have a target allocation of 60% stocks and 40% bonds.
For investors who want exposure to a broad market, mutual funds and ETFs make a perfect choice. Index funds have exploded in popularity in recent years. These funds follow the performance of a specific index – the S&P 500, for example – allowing an investor access to 500 large U.S. stocks with a single purchase.
Mutual funds and ETFs function largely in the same fashion, with a couple of key differences. Mutual fund shares are priced according to the fund’s actual assets, whereas ETFs are priced according to market supply and demand. Mutual funds are priced only once per day, whereas ETF values can fluctuate throughout the day – much like the price of a stock.
As with all IRA holdings, distributions and capital gains from mutual funds and ETFs are tax-deferred until money is withdrawn.
There are so many different IRA investment options competing for your attention that it’s hard to keep up with them all. For a first IRA, it can be a good idea to stick with the tried-and-true method of stock and bond investing, or letting someone else do the work for you by purchasing mutual fund or ETF shares. Your first IRA is a crucial milestone in your journey toward a comfortable retirement. Be sure you’re set up for retirement savings success by investing in a way that’s a good fit for you.