What Can You Invest in an IRA?

A mature couple reviews their retirement accounts.
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Any investor who is saving for retirement should consider having an individual retirement account (IRA) as part of their saving strategy.

IRAs are designed to allow investors to save money in a way that reduces tax liabilities, thus boosting their ability to save. For 2021 and 2022, the government allows investors age 49 and younger to contribute up to $6,000 per year in an IRA. (The annual limit is $7,000 for those age 50 or older.)

IRAs can work in tandem with employer-sponsored 401(k) plans and can even serve as a good replacement for such plans when necessary. But they have the distinct advantage of allowing for a wide range of investments.

Before we run down the possible IRA investment options, it’s first important to understand how IRA accounts can differ. A traditional IRA allows investors to deduct contributions from their taxable income, but any gains are taxed upon withdrawal. A Roth IRA, however, taxes earnings up front but allows all money to be taken out tax-free at age 59 1/2. 

Key Takeaways

  • An individual retirement account (IRA) enables you to save money for retirement while reducing your tax liability.
  • With a traditional IRA, you can deduct your contributions and will be taxed upon withdrawal.
  • With a Roth IRA, you're taxed upfront, but then you won't have to pay taxes when you take money out of the account after you turn 59 1/2.
  • You can purchase several investments through your IRA, including stocks, mutual funds, ETFs, bonds, and REITs.
  • You can also just leave cash in your IRA, but you can't use it for precious metals, collectibles, or life insurance.

What Investors Can Purchase Through an IRA

  • Individual Stocks: If a company is publicly traded, you can invest in it through your IRA. Buy big blue-chip stocks. Buy shares of small tech startups. Buy international stocks. If it’s accessible through your broker, you can put it in your IRA.
  • Mutual Funds: If you are not certain about which stocks to buy, you can purchase shares of mutual funds, in which money from investors is pooled together to build a portfolio of stocks, bonds, or other investments based on a specific strategy. You can get mutual funds that are designed to mirror the performance of the broader stock market, to track specific indexes, or to provide exposure to certain market capitalizations, sectors, or asset classes. Many brokers, including Vanguard, allow investors to make automatic regular investments into specific mutual funds.
  • Exchange-Traded Funds: ETFs are similar to mutual funds but trade more like stocks. They are priced like stocks and trade throughout the day, while mutual funds are priced only at the end of each day. They often have low expenses, and it’s possible to purchase a very small number of shares or even fractional shares in some cases.
  • Bonds: For those investors looking to diversify and for those closer to retirement age, it makes sense to put some bonds in their IRA portfolio. Bonds allow an investor to essentially lend money to a government or company in exchange for regular interest payments. U.S. Treasury bonds are an almost guaranteed source of stability and income. When it comes to bonds, it’s best to put taxable bonds in an IRA to avoid taxation on any gains or income. Tax-free bonds (such as municipal bonds) are not ideal for IRAs because these are already tax-advantaged. You'd get more out of municipal bonds by putting them in an otherwise taxable account. It’s worth noting that there are mutual funds specifically for bonds.
  • REITs: A real estate investment trust, or "REIT," is a type of stock that allows you to essentially own shares of real estate. There are REITs for office buildings, industrial spaces, multi-family apartments, and even hotels. REITs are known for paying out high dividends, because they are by law required to distribute most of their net income to shareholders. REITs are fine to keep in a Roth IRA, because their dividends are typically taxed at a higher rate than those of most other stocks. (If you want the dividend income right away, however, you will want to keep the investments in a taxable account.)
  • Cash: It’s perfectly fine to keep some cash on hand in an IRA, as it can give you the flexibility to purchase investments quickly. But cash can also be income-producing, especially if you purchase certificates of deposits (CDs). One popular cash strategy is to have tiers of CDs with a variety of interest rates and terms.

If you contribute to more than one IRA, your total contributions must not exceed the limits for that year.

Investments That Are Not Allowed in an IRA

An IRA can be a powerful thing because of the many types of investments permitted, but not everything can be placed into an IRA. It's tricky to invest in actual real estate, for example. Physical pieces of precious metal, such as gold bars or bullion, are also often not allowed. Life insurance typically isn't allowed. The IRS also forbids the placement of collectibles such as stamps, antiques, rugs, gems, or artwork in these accounts. Even alcoholic beverages are specifically forbidden from being put into an IRA.