With few exceptions, IRAs can invest in the same types of investments in which your taxable accounts can invest, including stocks, bonde, mutual funds, etc. ?However, your choice of what you invest in with your IRA may be different than what you invest in with your taxable account because IRA's differ from taxable accounts in their time horizon and their tax treatment.
Time Horizon
Time horizon means when you need your money back from an investment. ?Investments that are actively traded have a level of volatility risk associated with them. ?Of course cash, certificates of deposit and non-traded money market funds do not have volatility risk from trading. ?However, bonds, stocks, mutual funds, etc all trade daily and fluctuate in price from the date of purchase to the date of sale. ?The longer you can hold an investment the better the chances that you can maximize that investment's return potential and minimize selling the investment at a loss.
Retirement accounts have restrictions on withdrawal. ?Generally, no withdrawals are allowed without penalty until the owner reaches age 59 1/2. ?Also, distributions will be required starting after age 70 1/2. ?Depending on your age, these restrictions may mean that funds held in your IRA have a longer time horizon than the funds held in your taxable accounts. ?These longer time horizons may suggest that they could be invested in more aggressive or volatile investments.?
Excerpt from The Complete Guide to Estate and Financial Planning in Turbulent Times (Collaborative Press, 2011) - Walt Dallas, Contributing Author
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