Under IRS rules, IRAs can invest in almost anything, with the exception of life insurance, most types of collectibles and the shares of an S corporation, that is, shares of a company that chooses to transfer corporate income and losses to shareholders for tax purposes. There are many strategies you can use to create a portfolio, but here we'll focus on two. One option is to fill your IRA with individual stocks and bonds, or even a Silver and Gold IRA. Another is to compose your portfolio of mutual funds or exchange-traded funds (ETFs) for better diversification and, in the long term, better results. Finally, you'll need to consider what types of assets you want to keep.
Broadly speaking, there are six types of assets you can keep in your IRA: stocks, bonds, funds, real estate, commodities, and cash. While Warren Buffett may underestimate strong diversification, it is generally prudent to invest to achieve a certain level of diversification in order to spread risk and take advantage of potential rewards by making profits in different sectors, industries or assets. In other words, your own individual risk tolerance is a crucial factor to consider when determining your IRA's asset allocation. Because of the protection that the IRA would provide to the assets held in the account, the government did not want to provide a vehicle that could protect stolen works from recovery, says Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Massachusetts.
An IRA owner who discovers a collectible or antique worth thousands of dollars for sale at a garage sale will not be able to protect the income tax from the sale of this asset in an IRA or other retirement plans. Those who can psychologically manage fluctuating balances and potential capital losses can invest in riskier assets with higher potential returns. Since the IRS prohibits the use of funds or assets from an IRA as security for a loan, the IRS considers that any type of derivative transaction that has unlimited or indefinite risk, such as issuing short calls or differential ratios, is considered a prohibited transaction by the IRS. Asset allocation consists, in short, of diversifying your investments by holding different investment vehicles (such as stocks, bonds, real estate, cash or commodities).
In most cases, you'll want to allocate a larger part of the equity portion of your portfolio to the main asset classes, for example, that large-cap fund or a total stock fund and, secondly, to an international or developed market stock fund and less to smaller classes, such as small and medium cap funds and emerging markets. It's important to keep an eye on the horizon and evaluate the IRA asset allocation on a regular basis; most experienced investors rebalance their investment portfolios approximately every year to ensure that they stay on track. IRA investments in other unconventional assets, such as limited liability companies and real estate, risk disqualifying the IRA due to prohibited transaction rules that prohibit self-trading.
