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“What investment is best for my IRA”

Today’s question comes from a saver looking to allocate investments between their various retirement accounts.

The question is:

“What investment is best for my IRA”

 

IRAs can entail traditional IRAs or Roth IRAs. So today’s answer will be for traditional IRAs, and tomorrow’s answer will be on the best investment for ROTH IRAs. So tune in tomorrow if you are curious on how these accounts should be managed differently.

 

Money in a traditional IRA grows tax free, and is taxed as ordinary income when withdrawn.

What investments you put in your IRA is going to depend on a few things. The primary consideration is your time horizon. If you have 40 years of saving left to do, you want investments that have a higher potential for growth. This might be stocks, or real estate investment trusts, high yield bonds, etc.

This is because the capital gains will hopefully grow significantly. If you invest $10,000 today and it grows at 6% for 40 years, it will grow to $102,000. If this growth were outside an IRA, you would very likely be paying $15,000 in taxes when you sell. If this investment were instead held in an IRA, you would only pay taxes on the amounts needed to withdrawal every year.

 

However, later in life it gets more difficult to decide what investments to have in your IRA. By the time you are in your 50s or 60s, your investment allocation has likely changed to more conservative, and you likely hold more bonds. At this point in your life, taxes on the income your investments produce become more significant of a tax issue. Bonds pay interest which is taxed at your ordinary income tax rate, while stocks pay dividends that are typically taxed at a lower rate. So later in life you want investments that produce higher taxable income in an IRA, that means high yield bonds, corporate bonds and REITs.

Tune back in tomorrow and we will answer this question for a ROTH IRA.

Matt Hylland