Investing in Your IRA
You have a wide range of investment alternatives with your IRA, provided you choose a custodian that provides access to the products in which you're interested. For example, you can invest in stocks, bonds, mutual funds, exchange-traded funds (ETFs), managed accounts, options contracts and real estate investment trusts (REITs), among other alternatives. Some restrictions for IRAs include gemstones, art, collectibles and non-U.S. coins.
However, not all of your possible choices are well suited for IRAs. Municipal bonds are one example. Though interest from municipal bonds is tax-free when they're held in a taxable account, you'll owe taxes on the interest if the bonds are held in a traditional IRA. That's because the earnings on all assets held in a traditional IRA, regardless of their type, are taxed at your regular rate when you take distributions. In addition, though the interest is tax-free when distributed from a Roth IRA, municipals typically pay lower rates than comparable corporate bonds, which may leave you with fewer earnings than you may have been able to accumulate.
You may also want to consider the impact of trading costs if your investment approach means you adjust your portfolio frequently. Whatever you spend on transaction and asset-based fees reduces your potential return. Because IRAs have a long time horizon, a buy-and-hold strategy may make more financial sense.
IRA Permitted Investments
Because the IRA is a vehicle tailored for 'savings' and more specifically for retirement savings, the IRS has established rules that state very clearly which investments are 'allowable' in an IRA account.
Some IRA permitted investments include:
- Exchange-traded funds
- Mutual funds
- Government securities
- Selling covered calls
- Selling cash secured puts
- Purchasing calls*
* Long options are not allowed in Custodial accounts, Custodial IRAs and Coverdell ESAs
Options involve risk and are not suitable for all investors. Detailed information on our policies and the risks associated with options can be found in the Scottrade Options Application and Agreement, Brokerage Account Agreement, by downloading the Characteristics and Risks of Standardized Options and Supplements (PDF) from The Options Clearing Corporation, or by requesting a copy from your local branch office. Supporting documentation for any claims will be supplied upon request. Consult with your tax advisor for information on how taxes may affect the outcome of these strategies. Keep in mind, profit will be reduced or loss worsened, as applicable, by the deduction of commissions and fees.
The covered call option strategy may help generate income and offer limited downside protection, but does not provide full downside protection and may limit profit potential.
A protective put strategy raises the breakeven on the underlying by the amount paid for by the put. If the underlying stays above the strike price you can lose the entire premium upon expiration.
Scottrade does not provide tax advice. The material provided in this article is for informational purposes only and Scottrade is not responsible for any errors or omissions. Please consult your tax or legal advisor(s) for questions concerning your personal tax or financial situation.