Do IRA Accounts Invest in the Stock Market?

You may need several hundreds of thousands of dollars to last through your retirement and Golden Years. Individual Retirement Accounts (IRAs) offer long-term tax-deferral to help with the retirement planning process. Within your IRA, you may purchase bonds, mutual funds, money market securities, and of course, stocks. It is important to study the basic parameters of IRA accounts in order to trade stocks strategically.

Identification

In 1974, Congress first introduced Traditional IRA accounts to encourage people to save money for retirement. Traditional IRA contributions are pre-tax items that are deductible from your taxable income. From there, investments made through your IRA account grow on a tax-deferred basis until money is withdrawn from the account. IRA tax-deferral means that current dividend payments and capital gains on stocks within your account are not taxed. In exchange, you generally cannot withdraw funds from your IRA until age 59 ½ or you receive a 10 percent tax penalty. Upon withdrawal, your IRA funds are taxed as ordinary income.

Types

A Roth IRA may be described as the mirror image of the Traditional IRA. Roth IRA contributions are made with after-tax money. You can generally make $5,000 worth of annual contributions into your Traditional and Roth IRA accounts, combined.

Roth IRA investments grow on a tax-deferred basis. In retirement, Roth IRA withdrawals are tax-free. With a Roth IRA, you can withdraw your investment principal at any point. Investment gains, however, are subject to the 10 percent penalty tax if they are there are withdrawn before age 59 ½. These annual contribution limits increase to $6,000 if you are at least 50 years old.

Features

You can set up a Traditional or Roth IRA account through a financial services institution to begin trading individual stocks or buying stock mutual funds. You may also open IRA accounts to buy shares directly from mutual fund companies and larger corporations. Direct investing is ideal for smaller investors and features minimal, if any, commission costs. Most direct investing plans allow you to purchase shares for as little as $50 per month.

Considerations

Because of tax-deferral, stocks are good investments for both Roth and Traditional IRA accounts. As a young professional, you should prioritize a Roth above a Traditional IRA account. Tax-free Roth IRA withdrawals are more of a benefit when you expect to retire within a higher tax bracket. The tax-free withdrawals also make the Roth ideal for your most aggressive stock investments, as you would also forgo capital gains taxes. As a high earner, you may still favor Traditional IRA accounts that reduce your current taxable income.

Warning

Traditional IRA tax-deferral may not last throughout your lifetime. At age 70½, you must take required minimum distributions (RMDs) out of the account. The IRS provides materials on its website for you to calculate your RMD. Required minimum distributions are not applicable to Roth IRAs.