IRAs can be powerful tools for retirement savers to reach their financial goals; however, they’re only as safe as the investments you choose to place within them.
Start investing with index funds and exchange-traded funds that track familiar indices – they’re low cost, secure and interest rate sensitive.
Certificates of Deposit
IRA CDs provide stability for investors looking to avoid the high degree of market volatility. Backed by the federal government and offering fixed interest rates that banks compete over to offer as competitively as possible – they’re especially helpful for those needing their funds in the next couple years, such as vacationing or purchasing real estate.
Robo-advisor firms make investing easy and affordable, offering low-fee ETFs with automatic rebalancing to select asset classes – Betterment being one of the leading robo-advisor firms that provides this service, in addition to free IRA accounts.
As with all investments, it’s crucial that IRA investments align with your goals, time horizon, and risk tolerance. For instance, near retirement it may be beneficial to use equity index funds in your taxable accounts while investing more tax-efficient bond funds in your IRA in order to both lower tax bills while helping reach retirement savings goals faster.
Money Market Funds
With interest rates near historical lows, money market funds offer some of the safest IRA investments. These short-term funds invest in shorter-term debt such as Treasury bills that carry lower credit risks; furthermore they come equipped with FDIC insurance and limit withdrawals each month. Some of the top funds currently boast yields above 5%.
Mutual funds offer investors a modest but steady return, although usually lower than what can be earned with traditional bank savings accounts or high yield online savings accounts. Also like all mutual funds, they pose some degree of risk.
Under conditions of market instability or economic unpredictability, some money market funds may dip below their target share price of $1 (known as “breaking the buck”). Although such events are rare, it’s still wise to select funds with a track record for maintaining stable net asset values – not forgetting fees which may eat into returns over time.
Stocks
Investment in stocks is one of the top retirement investments. Mutual and exchange-traded funds tend to provide greater diversification while individual stocks offer potentially higher returns if they perform well.
Many IRA custodians do not permit certain investments such as rental real estate and oil and gas interests, while some do permit these for an extra fee. It’s essential that you conduct due diligence on what may or may not be allowed depending on your particular circumstance – speak to your retirement or financial advisor for advice.
If you want to take the stress out of investing, professional-managed IRA funds such as target date or asset allocation funds could be the perfect solution for you. They provide diversification that automatically manages risk and return according to your goals, timeline, and risk threshold.
Bonds
Bonds typically offer higher interest rates than deposit accounts and may help diversify an investor portfolio, although their price can decline if interest rates rise.
Treasury bills and bonds are among the safest bonds to invest in because they’re backed by the federal government, but these securities typically do not generate much return. Another viable solution could be investing in a bond mutual fund or exchange-traded fund.
Investors should prioritize selecting an IRA provider who offers an extensive selection of assets. When researching potential providers, evaluate their fee structures closely – providers that charge hidden setup or other setup fees can compromise returns significantly. SmartAsset’s free tool connects investors with financial advisors who can offer guidance and support as they interview and present clients to find them the most appropriate IRA providers.
