IRAs
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. In fact, the only restrictions forbid 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.
IRA permitted investments include:
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Stocks
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Bonds
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Unit Trusts
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Mutual Funds
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Government Securities
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Selling Covered Calls
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Purchasing Calls*
IRA disallowed investments include:
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Selling Puts
* Long Options are not allowed in Custodial Accounts, Custodial IRAs and Coverdell ESAs
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