Do IRA Accounts Invest in the Stock Market?
Depending on how close they are to retirement age, many investors want to choose investments that are likely to earn the most money over time, and historically that has been stocks. IRAs can and do participate in the stock market. Individual investors, however, need to determine their own needs and tolerance for risk when deciding how much of their IRA contributions should be invested in the stock market.
While the U.S. Tax Code specifically lists a few investments that IRA accounts cannot invest in -- such as collectibles and life insurance -- it is not so clear-cut about what assets are allowed. The tax code was written with the intention of giving retirement investors as many options as possible. For the most part, any investment a bank, mutual fund or brokerage would offer the average investor is fair game for IRA accounts.
Your age plays an important role in how much of your IRA account should be invested in the stock market. The younger you are, the more retirement money you can risk in the stock market because you have a longer time horizon to ride out the market downturns that periodically occur. Someone who is contributing to an IRA in her 20s might choose to risk as much as 80 to 90 percent of the account in stocks. By the time an investor reaches 60, the percentage of the IRA she invests in the stock market is often much lower -- perhaps about 20 percent.
Your tolerance for risk is an important factor when deciding how much you want to expose your IRA account to the stock market. You will have to decide whether to invest in individual stocks, bonds or mutual funds. IRAs are more flexible in this regard than company 401(k)s. Company 401(k) plans usually only allow workers to invest in mutual funds, which are less risky because they contain shares of many different companies. IRA account owners, by contrast, can invest not just in mutual funds but in individual stocks, which are more risky because individual shares could potentially fall to zero.
While past performance is no guarantee of future results, bonds have historically been less volatile than stocks but offer a lower return. The stock market is far more topsy-turvy than bond investments, but stocks have historically posted higher returns than bonds and other assets allowed in IRA accounts over time. So, investors with a longer time horizon for retirement may have a better chance reaching retirement goals by investing IRA accounts in the stock market.
Tim Grant has been a journalist since 1989 and has worked for several daily newspapers, including the Charleston "Post & Courier," the "Savannah News-Press," the "Spartanburg Herald-Journal," the "St. Petersburg Times" and the "Pittsburgh Post-Gazette." He has covered a variety of subjects and beats, including crime, government, education, religion and business. He graduated from The Citadel with a Bachelor of Science in business administration.