Are Roth IRAs Connected to Stock Market?
The Standard and Poor's 500, a common index of stock market performance, loses 13.5 percent of its value from peak to trough during any calendar year, says "Kiplinger" magazine. While the index has gained 9.8 percent per year since 1926, the short-term volatility of stocks makes some investors uneasy, and you might wonder if your IRA account is related to the stock market and subject to these sometimes rapid price changes.
IRA as Container
A Roth IRA is a type of account and is not an investment by itself. Think of it as a container, or a basket that holds many different items. You can have stock market investments in your IRA basket, which connects your IRA performance directly to the stock market, but other investment types will avoid stock market volatility.
By working with a stockbroker or brokerage firm that offers IRA custodian services, you can invest in individual stocks that you choose with your Roth IRA. You give the broker money, and he makes the stock purchases for you, holding the stocks as part of the IRA account. The investments cannot be under your direct control due to IRS requirements, but the broker must invest the money the way you want.
Stock Market Mutual Funds
You can invest in stock market mutual funds through a broker or by going directly to mutual fund companies. Mutual funds are similar to an IRA in that they are a container that can hold many different types of investments. A stock market mutual fund will purchase stock in companies based on the fund manager's choices, as well as the investment philosophy of the mutual fund.
If you want your Roth IRA to operate independent of the stock market, you have many choices for your investments. You can choose a bank savings account or certificates of deposit. Most banks offer IRA services. You can also choose mutual funds that do not invest in the stock market, such as a money-market fund or a bond fund. You can also use a self-directed IRA and choose more nontraditional IRA investments, such as real estate or a small business.
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.