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What’s a Powerful Diversification Tool with Beneficial Tax Treatment You’ve Likely Overlooked? IRAs!

One of the most attractive investment products that can help you save for your retirement is an Individual Retirement Account (IRA). These savings vehicles come in two major forms, traditional IRAs and Roth IRAs.

Why Use an IRA to Invest for the Future?

One of the reasons why an IRA is such an attractive way to invest is that IRAs offer several tax advantages, as opposed to other forms of investing. Depending on your annual income, contributions to a traditional IRA are tax-deductible, you only pay taxes when you take distributions from your IRA. Contributions to a Roth IRA are not tax-deductible, but earnings grow tax-free and investors typically don’t have to pay taxes on their withdrawals.

Investment Ideas for Your IRA

Using your IRA to save for retirement is a little bit different than other types of retirement plans and savings vehicles. One thing that sets them apart is the wide range of items that savers can invest in and still reap the tax benefits offered by IRAs.

To get started, savers will need to open their IRA account with a trustee, such as an investment firm or bank. The IRS has certain limitations about what types of assets one can hold in their IRA account, and trustees can also place limitations on what types of investments savers can hold in their IRA.

Some of the most common IRA investment options include investment vehicles that are broadly grouped into the “traditional” investment category and include products such as stocks, bonds, exchange-traded funds (ETFs) and mutual funds.

In addition to these classic investment options, IRAs offer savers alternative options when they choose a self-directed IRA. Depending on your trustee’s limitations, you will fund your IRA with U.S. Dollars. Next, you can instruct the trustee to use your IRA to invest in traditional options, like stocks, or to choose alternative investment categories such as foreign currencies, crypto-currency, business property or specific types of gold coins that are held for their currency value rather than as a collectible.

Benefits of Alternative Asset IRAs

Using your IRA to invest in alternative options is an important way of reducing your exposure to events that can lead to broad-scale market downturns. This is because alternatives like the Iraqi dinar and other currencies in foreign countries with emerging economies offer the prospect of rapid growth, but move in less correlation to the overall strength and value of the U.S. Dollar.

Potential Limits Applied by Custodians of Your IRA Investment

It’s important to note that not all investment firms will allow their clients to invest in alternative options, even though these options are not expressly forbidden by IRS rules. Before you open and fund your self-directed IRA, always be certain to ask the firm which investment products they will allow you to purchase and hold through them as they act as the custodian of your investment.

Limitations on Investments Applied by the Internal Revenue Service (IRS)

Numerous assets are specifically excluded from being held within an IRA. One of the most surprising exclusions deals with real estate. Under IRS rules, an IRA cannot be used to purchase property for personal use, such as a home or vacation property. 

An important exception to this rule is that the IRS will allow savers to invest in business property, as long as the investor, or anyone closely connected to them, never owned the property previously. 

Another unexpected exclusion is holding derivatives with ratio spreads. The rationale is that this type of investment has an inherent, and unlimited, risk of loss. Life insurance products, with the exception of those with a minor, incidental benefit are also prohibited from being acquired and held within an IRA.

Most antiques and other collectibles are also expressly excluded, including gems, oriental rugs, fine art, and fine wine. Collectible coins, including most gold coins like the Krugerrand and the U.S. Double Eagle, are also prohibited.

The Best Reasons to Invest in an IRA

According to some studies, the U.S. is facing a retirement crisis, as it is estimated that 45% of working households have nothing to live on in retirement other than their potential Social Security benefits. For this reason alone, IRAs are an important tool to help Americans be able to prepare for retirement, despite the limitations and prohibitions.

In addition to their tax treatment, the ability to use IRAs to acquire alternative investment products, such as foreign currencies, makes them an effective mechanism to reduce the risk of loss, increasing their appeal to all investors.

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