Can You Invest in Stocks Within an IRA?
Understand how to leverage your IRA for stock investments. This guide covers the mechanics and tax benefits of growing your retirement savings.
Individual Retirement Accounts (IRAs) offer a valuable way to save for retirement. It is possible to invest in stocks, among other asset classes, within an IRA, which functions as a personal savings plan with tax advantages.
Permitted Investments
IRAs generally permit a broad range of investment options, with stocks being a prominent choice. Individual common and preferred stocks are available for purchase, as are mutual funds and exchange-traded funds (ETFs). Mutual funds are professionally managed portfolios, while ETFs trade like stocks but hold a basket of assets.
Beyond equities, typical IRA holdings include bonds, which represent loans to governments or corporations, and certificates of deposit (CDs). Money market accounts are also common, providing a low-risk option for holding cash.
However, certain investments are disallowed in standard IRAs. These include collectibles like artwork, antiques, gems, stamps, most coins, and alcoholic beverages. Life insurance contracts are also prohibited.
How to Invest in Stocks within an IRA
Investing in stocks through an IRA begins with selecting the appropriate account type. The two most common types are the Traditional IRA and the Roth IRA.
A Traditional IRA allows for pre-tax contributions, which may be tax-deductible, and earnings grow tax-deferred until retirement. Contributions to a Roth IRA are made with after-tax dollars, but qualified withdrawals in retirement are tax-free.
After choosing an IRA type, open an account with a brokerage firm. These firms provide platforms for purchasing and selling stocks. To open an account, individuals need to provide identification, their Social Security number, and bank account details for funding.
Funding can occur through direct contributions, electronic transfers, or rollovers from employer-sponsored plans like a 401(k). Once funded, individuals can select and buy stocks. Brokerage platforms offer tools for research and executing trades, allowing users to identify stocks, place orders, and manage their portfolio.
Important Considerations for IRA Stock Investments
Investing in stocks within an IRA provides distinct tax advantages compared to a regular taxable brokerage account. Traditional IRAs offer tax-deferred growth, while Roth IRAs provide tax-free withdrawals in retirement, provided certain conditions are met.
Annual contribution limits apply to IRAs. For 2024 and 2025, the maximum for those under age 50 is $7,000. Individuals age 50 and older can contribute an additional $1,000, totaling $8,000. These limits apply across all Traditional and Roth IRAs held.
Withdrawal rules are an important aspect of IRA stock investments. Withdrawals made before age 59½ are generally subject to a 10% federal penalty tax, plus regular income taxes.
Exceptions to this penalty include withdrawals for a first-time home purchase (up to $10,000 lifetime limit), qualified higher education expenses, or certain unreimbursed medical expenses. For Roth IRAs, contributions can be withdrawn at any time without tax or penalty. Earnings withdrawals are tax-free only if the account has been open for at least five years and the account holder is age 59½ or meets another qualified exception.
Traditional IRAs are subject to Required Minimum Distributions (RMDs), mandating withdrawals annually once the owner reaches age 73. Roth IRAs do not have RMDs for the original owner.
Given the long-term nature of retirement savings, the volatility of stocks is often viewed within the context of many years of growth potential.