Is it Better to Have Stocks or Bonds in an IRA?
IRAs impose stringent guidelines limiting what can be purchased within their accounts to preserve their primary function as retirement savings vehicles and prevent misuse of tax advantages. I Bonds that generate interest do not qualify.
Vanguard Real Estate Index VGSLX, however, benefits greatly from having its investments held within an IRA account as they are designed to avoid capital gains distributions.
Holding stocks in an IRA allows you to defer capital gains or income taxes until the time comes for withdrawing the money, making this type of account an excellent place for holding any stock that would otherwise be subject to taxation in a traditional brokerage account.
For your IRA investments, low-cost index funds typically represent the best choice. Growth-oriented stocks, such as shares in young companies that typically possess greater growth prospects but could eventually stagnate or even fail (consider your RDFN), are another good choice.
Target-date funds provide another viable investment solution, providing a fully diversified portfolio in one simple investment vehicle. They automatically adjust to your retirement age for smoother navigation than actively managed portfolios can.
Bonds are debt instruments issued by governments and corporations to raise money, with purchasing them entering you into an agreement wherein the issuer will pay interest over time and return your original principal at maturity. Bond investments typically produce lower returns but may be less volatile.
Outside of retirement accounts, bond income is subject to ordinary income rates that can reach 39.6% compared to capital gains rates as low as 15% on stock funds that have been held more than one year. Contributing taxable bond funds or individual bonds into an IRA may help defer taxes until you withdraw the money from it.
When choosing bond funds for an IRA, look for lower-cost options with proven track records such as Vanguard Dividend Growth VDIGX which invests in large cap stocks that have outperformed smaller ones over time.
Retirement planning strategies shouldn’t be treated as one-size-fits-all solutions; rather, an individualized strategy should be created with professional assistance.
Your goal should be to craft a portfolio that aligns with your objectives, risk tolerance and time horizon. A retirement income calculator can be an excellent way of accomplishing this task.
While IRAs provide great tax benefits, they’re not the only way to save for retirement. Mutual funds or exchange-traded funds (ETFs) offer investors exposure to an array of stocks, bonds, and other assets in one package.
An annuity is another investment option available to you, which pays either a guaranteed rate or according to the performance of mutual-fund-like investments you choose. Fixed annuities offer competitive interest rates with principal protection; indexed annuities credit gains or losses according to stock market index performance; both can be held within an IRA account*Most non-investment-grade bonds are riskier than their investment-grade counterparts but still earn interest and return principal. Income earned from them and their bond funds is taxed as ordinary income both federally and sometimes state taxation rates when taxed at ordinary income rates when taxed as regular income tax rates;
However, unlike bonds, stocks with frequent dividend payments can be taxed at a special 0% capital gains rate in an IRA. Outside an IRA account however, you will pay ordinary income tax on dividends or capital gains on shares you sell (up to certain limits).
Buy-and-hold investors may find the lower tax rates attractive, although younger investors might face much higher capital gains taxes on stock funds compared to bonds, so holding their stocks in taxable accounts might be preferable.
Municipal bond funds and TIPS can make an excellent addition to an IRA account because their interest is compounded semi-annually on adjusted principal. But be wary of investing in actively managed mutual fund stocks which make frequent trades as they could trigger capital gains tax liability each year; such funds would be better suited for taxable brokerage accounts instead.
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