One of the investing tools that is rising in popularity right now is the Individual Retirement Account (IRA). The Roth IRA has received a fair bit of attention lately, but the traditional IRA is also in high demand. This is because an IRA can be opened by anyone with earned income. This means that you don’t need to go through your work to set up a retirement account. You can do it on your own, and hold various investments of your choice in it.
Indeed, one of the reasons that IRAs are becoming increasingly popular is due to the fact that it’s possible to be more flexible in determining what investments go into the retirement account. In some cases, your company 401(k) plan just doesn’t offer that kind of choice. On top of that, IRAs are fairly easy to open. Most online brokerages offer IRA plans, so you can open an account and hold what you like inside of it.
Investments You Can Hold in an IRA
One of the great things about the IRA is that you can hold a number of investments inside. And, if you have a Roth IRA, you don’t have to pay taxes on your earnings when you withdraw. This can be a big deal later on down the road if you are afraid that your taxes will increase in retirement.
Some of the investments that are permissible inside an IRA include stocks, bonds, funds, and cash. You can keep CDs in your IRA. Indeed, there are some special high yield CDs that are marketed as ideal for use in IRAs. You can also hold dividend paying investments, such as dividend paying funds and dividend paying stocks, in your IRA. This can be useful if you have the dividends automatically reinvested. They are considered part of your IRA, and continue to grow tax-free.
It’s even possible to include some types of options contracts and futures (like commodities and currencies) in your IRA. However, you will need a more flexible custodian, since some IRA providers will not agree to these types of investments. You might also be able to find a custodian that allows covered call writing as an option in your IRA.
Investments that are Difficult to Hold in Your IRA
There are some investments that you aren’t allowed to hold in your IRA at all. The IRS makes these rules, and prohibits the following investments in IRAs:
- Life insurance: For the most part, you can’t hold life insurance in an IRA. There is a special rule, called the incidental benefit rule, that allows certain purchases of small amounts of life insurance for a qualified plan, but for the most part, life insurance isn’t allowed in an IRA.
- Collectibles: You can’t keep the value of collectibles in an IRA to shield you from the taxes on the gains. Collectibles include antiques and other items. Additionally, coins are considered collectibles, so don’t try to hold those in your account. There are some coins that you can include, but they must be very pure to the point that they aren’t considered collectibles.
- Real estate: It’s very difficult to qualify for holding real estate in your IRA. You can’t benefit directly from the property, so if you receive rental income, or live in the property, you can’t put it in your IRA.
- Most derivatives: As you saw above, it’s possible to hold some types of derivatives in your IRA. However, most derivatives, especially naked call writing and ratio spreads, are not allowed.
Make sure you understand the rules before you try to add an investment to your IRA.