Is it Better to Have Stocks Or Bonds in an IRA?
To maximize your retirement savings, it is wise to find an IRA provider with low fees. Excessive fees can decrease the value of your investments by decreasing their compounding rate.
Passively managed stock index funds often make an excellent addition to an IRA; if you intend on expanding into other investments within your IRA, however, it’s wise to carefully consider their tax treatment before proceeding.
Stocks
Investors investing with an IRA should select funds that align with their investment goals and risk tolerance, but also remember to factor in tax considerations when making decisions regarding an IRA account.
Stocks may accrue short-term capital gains that would normally be taxed at your ordinary income tax rate, but in an IRA these profits won’t be subject to taxes until they’re withdrawn from the account.
When selecting stocks to invest in an IRA, prioritize those which offer reliable dividends with a history of increasing them. One useful metric for finding such companies is the Dividend Aristocrats list which ranks companies with long histories of rising dividends.
Bonds
While stocks tend to form the cornerstone of retirement accounts, diversifying with bonds may help cushion against sudden price changes in stocks.
Bonds pay a fixed interest rate and must be held until their maturity date, usually 20 or 30 years later. Treasury bonds offer the least risk; they tend to yield low yields and maturity dates may stretch into the far future.
Corporate and junk bonds provide higher interest rates with more volatile prices; municipal (city, county or state) bonds may even be tax-exempt depending on where you reside.
Stocks that pay dividends – which provide shareholders with regular distributions from company profits–can make excellent IRA investments, since dividends are taxed at a lower capital gains rate than ordinary income. Furthermore, high dividend-paying stocks often outperform non-dividend-paying stocks during market downturns.
Taxes
Investment in your IRA that generates dividend income or capital gains will help you avoid taxes, as the earnings will remain tax-sheltered. This is crucial because traditional IRA distributions are taxed at ordinary income rates while Roth IRA withdrawals can be done tax free.
IRAs also provide more investment options than 401(k) plans do, with access to a wider selection of low-cost mutual funds and exchange-traded funds, spousal IRAs, SEP IRAs for employers to contribute on employees’ behalf, etc.
IRAs can also be utilized for investments that offer growth potential, like shares of relatively young companies. While such shares can appreciate rapidly in value over time, they may also stagnate or disappear completely – making them excellent investments to use within an IRA account.
Diversification
Diversification is an invaluable investing strategy, and exchange-traded funds and mutual funds make it simple. You’ll find an array of index and bond funds designed specifically to diversify your portfolio; alternatively, consider investing in smaller-cap stocks, international companies or short- and long-term bonds for added protection against rising interest rates and help protect the value of your portfolio.
Stock funds typically deliver higher long-term returns than other investments, yet are riskier due to price fluctuation. A basic diversified portfolio could consist of one or more such funds such as Gold-rated Vanguard Dividend Growth VDIGX and First Eagle Overseas SGOVX; US Treasury bonds of various durations might also help diversify exposure against rising interest rates; target-date funds provide added convenience by automatically shifting between stocks and bonds as you approach retirement age.
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