Three months ago, plenty of investors got in under the deadline to make yearly contributions to their IRAs. But it's not good enough just to open an account and deposit some money. To make the most of your retirement account, you need to make the best investments you can -- and avoid ones that don't make sense.
Why IRAs are smart
If you like immediate gratification with some added benefits for the future, then traditional IRAs are right up your alley. Many taxpayers get a current deduction, and filing procrastinators can even allocate their contributions to the previous tax year and save on taxes even faster -- although the deadline to roll your calendar back to 2010 was back in April, so you're stuck with a 2011 tax year contribution now.
Despite the current tax savings, the true value of an IRA comes between now and when you retire. Throughout your working years, your IRA shelters any income within your account from tax. That means you can earn dividends, sell shares at a profit, and get paid interest in an IRA without worrying about the tax implications.
What doesn't belong in an IRA
In exchange for those benefits, there's a catch: You have to pay tax when you withdraw money from your IRA. Even worse, ordinary tax rates apply -- even if that income was generated from dividends and capital gains that would qualify for lower rates outside an IRA.
That makes shares of nondividend growth stocks a double-edged sword for IRAs. You could own shares in a regular taxable account, and if you held them for the long term, you'd pay only 15% in capital gains taxes. Within an IRA, however, you'd pay rates as high as 35% on the same income.
Get these stocks into your retirement account
So what's the best IRA investment? Stocks that produce high amounts of income that would be taxed at relatively high rates outside an IRA make great bets for a retirement account.
Let's take a closer look at three categories of investments that fit better in an IRA than elsewhere.
1. Real estate investment trusts
The best example of an investment that takes maximum advantage of an IRA is the high-yield REIT. Mortgage REITs ARMOUR Residential
Of course, mortgage REITs aren't without risks. They're highly leveraged and sensitive to interest rates. But if you think rates will stay low for the foreseeable future, thanks to a sluggish economy, then the healthy income they provide could well be worth the risk.
2. Precious metals
Many people don't know that you can own certain types of gold and silver bullion in an IRA. But with interest in precious metals on the rise, more and more people are becoming aware of that fact.
The benefit of owning precious metals in a retirement account, whether it be through physical bullion or via exchange-traded funds like ETFS Physical Palladium
3. Income investments
In addition to stocks, most investors allocate some of their money to bonds or bond ETFs. Those investments can make great assets for an IRA. For instance, SPDR Barclays High Yield Bond
Inflation-indexed bonds get extra benefits from the shelter of an IRA, because they are also subject to quirky tax rules. Although investors only receive a small interest payment, the IRS collects tax on the inflation adjustment as well as the interest you receive. So if you own individual inflation-indexed bonds or an ETF like iShares Barclays TIPS Bond
So if you're still sitting on cash you put into your IRA back in April, get your IRA working harder for you. By choosing smarter investments for your retirement account, you'll get your long-term nest egg into high gear in a hurry.
The right stocks can make a huge difference to your investing results. The Fool's free report "5 Stocks The Motley Fool Owns -- And You Should Too" includes some great ideas for companies that are meeting the challenges of this tough economy. You can also get your IRA working harder for you with tips from our IRA collection.
Fool contributor Dan Caplinger knows everyone needs to be smart with their money. You can follow him on Twitter here. He owns shares of iShares Silver Trust. The Motley Fool owns shares of Annaly Capital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always gives you the first pick.
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