Investing in a 401k can seem confining, as you are usually limited to a few mutual funds selected by your employer. By contrast an individual retirement account, or IRA, that you set up independently is much more flexible. And for many investors this is one of its big attractions. Your choice of investments for an IRA is almost unlimited, although there are just a few classes of holdings which are not permitted.
Most people might think of mutual funds when they consider IRA investments. You can hold these of course, along with any other stocks and bonds. You can hold a certificate of deposit, a savings account or a money market account. You can also invest in specialized funds such as exchange-traded funds (ETFs) or Treasury Inflation Protected Securities (TIPs).
Coins and Bullion
You are allowed to hold a limited range of coins minted by the U.S. Treasury in your IRA, including the gold and silver eagle coins. You can invest in gold, silver or platinum also.
You can hold real estate within an IRA, but the ways in which you can do this are quite limited. Broadly, you are not allowed to hold any property from which you derive a benefit or for which you provide services, such as your own primary residence or a vacation home. All expenses associated with the property must be met with funds from the IRA itself. The transaction regulations around real estate are also very restrictive. If you want to hold real estate in your IRA you may have to shop around for a trustee who specializes in this field, and you might have to pay extra fees.
What's Not Allowed
You may not hold any type of life insurance within your IRA. Certain speculative instruments such as derivative trading are also forbidden. You may find that some IRA custodians also won't let you trade futures or invest in hedge funds. You may not hold collectibles such as antiques, jewelry or works of art in your IRA, as you are not allowed to avoid capital gains tax on this type of asset by using a tax-advantaged account.
As you consider which investments to put into your IRA, keep a careful eye on their tax efficiency. Bonds and bond funds that are taxed at a high rate do best within a tax-sheltered account such as an IRA.
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