When you read about the state of Americans' retirement accounts, the news is often bad. But there is some good news on the retirement front that shows that people are using a useful tool to save for their golden years.

According to data from the Employee Benefit Research Institute, IRAs have become the most important component of people's retirement savings plans. The total assets in IRAs grew in 2006 to $4.23 trillion, a rise of 16.5% from 2005 levels. That makes IRAs the dominant vehicle, exceeding the assets held in defined contribution plans like 401(k)s, as well as assets in traditional private pensions.

That's great news. But once you have money in your IRA, what's the best way to invest it?

The way to save
Details of the study reveal many tips to help people understand how to invest and plan for their retirement.

  • The substantial rise in IRA assets strongly suggests that most retirement investors have significant exposure to stocks. For long-term goals like retirement, that's the best strategy. But it had been widely feared that many retirement investors were too conservative, leaving too much of their money in money market funds and other low-yielding investments.
  • Most of the money in IRAs didn't come from direct contributions. Instead, the largest inflows -- more than $200 billion per year -- originated from rollovers from employer sponsored accounts.
  • In the past 25 years, people saving for retirement have shifted from financial institutions like banks and insurance companies, which tend to offer less aggressive investment options. In 1981, 81% of IRA assets were held at these institutions. Now, however, they hold only 15%. Mutual funds now have nearly half of all IRA assets, with brokerage accounts making up another 38%.
  • Roth IRAs are popular for new contributions, but they still make up only a tiny fraction of overall IRA assets. Just over 30% of contributions to IRAs were made to Roth accounts, but the total assets in Roth IRAs amounted to just 3% of all money in IRAs.

What to put in your IRA
The most important feature of IRAs is that you have total control over what you invest in. Many employer sponsored plans have very limited offerings that can keep you from creating the diversified portfolio you want.

The flexibility of your IRA allows you to diversify with investments you can't buy in your 401(k) plan. No matter how bad your fund options are, you probably have access to a large-cap stock fund with familiar names like General Electric (NYSE: GE) and IBM (NYSE: IBM). But your plan might not give you good choices in other asset classes, many of which have outperformed large-cap stocks recently.

Asset Class

Sample Stock

1-Year Return

Small-Caps

Dolby Laboratories (NYSE: DLB)

41.7%

International

Sasol (NYSE: SSL)

40.6%

Real Estate

Digital Realty Trust (NYSE: DLR)

2.6%

Precious Metals

Newmont Mining (NYSE: NEM)

17.1%

Emerging Markets

Vimpel-Communications (NYSE: VIP)

110.8%

That's where your IRA comes in, letting you buy into all those assets to build a truly diversified portfolio.

It's nice to read that many people are taking advantage of IRAs. Are you one of them? If so, keep up the good work. But if you haven't yet, take a moment and see how easy it is to get started.

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Fool contributor Dan Caplinger hopes for a successful retirement. He doesn't own shares of the companies mentioned in this article. Sasol is an Income Investor and Global Gains recommendation. Dolby Laboratories is a Stock Advisor recommendation. The Fool's disclosure policy is a key to our success.