Q. Can IRAs hold investments other than mutual funds, such as individual stocks?
A. They sure can. An IRA itself isn't an investment. Think of it as a container that helps you avoid taxes on earnings (and sometimes on your contributions, too) until you begin withdrawing money years later. In your IRA, you're free to invest in a broad array of securities to be held in the account by a custodian. The custodian may be a bank, a broker, a mutual fund, or an insurance company.
If you want to invest in stocks, establish your IRA with a brokerage in a "self-directed account." You can then buy stocks or just about every security offered by the broker, such as CDs, bonds, T-bills, and mutual funds. You can't use the money in an IRA to buy a life insurance policy, nor can you invest on margin, i.e., borrow money to purchase investments. While many people think you can't buy actual real estate with IRA assets, a Fool Community member made a case for how you can.
There's actually a benefit to holding and trading stocks in an IRA account: You avoid current taxation on any capital gains. Trade stocks in a traditional IRA account and the tax is deferred. Trade in a Roth IRA and, assuming you follow the rules, you'll be trading tax-free!
Learn more about retirement issues in our retirement area and in our Roadmap to Retirement How-To Guide. If you'd like to learn how to open an IRA in a minute's time, check out our 60-second guide to opening an IRA.
If thinking about retirement makes you wish you had a financial pro with whom to discuss your situation, read more about TMF Money Advisor, a valuable service we're offering, featuring customized independent advice from a variety of objective financial pros. An advisor can help ensure that you're saving enough to meet all your needs.
If you have any questions, thoughts or opinions on this column, share them with others on our Ask the Fool discussion board.
This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.
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