Typically, individual retirement accounts (IRAs) are accounts designated for retirement savings. These accounts are usually recognized by the IRS, thus allowing them to offer users several tax advantages. However, depending on their structure, some IRAs are much safer than others. In addition, the types of funds or other assets you invest in and the financial institution in which you open an IRA will also determine the safest IRA investments.
Are IRAs High Risk?
Most IRAs are pretty safe because the custodians of these accounts, including banks and insurance and trust companies, must be approved by the IRS.
However, some of the IRAs you open will be riskier than others. Generally, self-directed IRAs pose the most significant risk to investors looking to invest and save for retirements. That is because they offer more leeway concerning what you can invest in – far beyond what most custodians usually permit. Some of the alternative investments you can make through self-directed IRAs include:
- Tax lien certificates
- Promissory notes
- Real estate
- Digital assets like crypto-currency
- Precious metals
Due to the limited custodian protection and increased financial exposure when investing in these sometimes off-limits assets through a self-directed IRA, you are more likely to fall victim to fraud. You may end up becoming more vulnerable to data theft or substantial financial losses.
For these reasons, self-directed IRAs are considered very high-risk. So, you may want to be careful when investing for retirement through such an account.
Can You Lose all Your Money in an IRA?
You or your employer will be responsible for funding your IRAs. So, these accounts work along the lines of a defined contribution plan. Therefore, there are no guarantees that you will receive a specific sum of money in your retirement as is usually the case with defined benefit plans.
Instead, what you get in your retirement depends on market performance. If the market does well, you could end up with huge earnings. On the other hand, if the market performs poorly, you could lose money.
As a result, if you are really careless with your investments, you could lose all the money in your account. However, some types of investments are secure and, thus, enable you to at least preserve your principal. So, if you invest in such assets, you will have some money for retirement.
What Are the Safest IRA Investments?
Below are some safe IRA investment options you should consider. They may not generate as many returns as you would like, but they will help safeguard your principal.
1. Certificates of Deposit (CDs)
A CD is a fixed savings account. You will be required to fund this kind of account with a lump sum then leave it to mature for a set period. The financial institution you partner with, such as credit unions or banks, will give you a specified interest during that period.
At the end of the maturity period, you are guaranteed to receive your principal. Typically, federally insured banks guarantee up to $250,000 for all accounts in an individual’s name.
So long as you understand all the terms and conditions and don’t go through unlicensed and uncertified deposit brokers, investing in CDs through an IRA will help safeguard your investments.
An annuity is an insurance contract that enables you to earn a fixed income for your lifetime or a specified time. You can purchase it through an IRA using a lump sum payment or a series of payments.
Annuities are popular because they tend to guarantee the protection of your principal even though the returns are usually conservative. The contract you have with your insurance company is generally legally binding. However, there is always the risk that some annuities may outlive you, especially if they are deferred. That said, your beneficiaries could inherit them.
Bonds are debt securities. These securities enable you to lend money for a specified period to a government or company so they can use them to fund public service projects or business operations. In return, the borrower will pay you a specified interest rate regularly until the bond matures. On the maturity date, you will also receive back your principal.
Bonds tend to be secure because they preserve the initial amount you invest. And generally, U.S. Treasury offerings, which include TIPS, bonds, bills and notes, tend to be among the safest IRA investment options available. That is because the U.S. government fully backs them.
4. Money Market Funds
You can also invest in a money market via an IRA. Debt securities in this kind of market tend to be short-term but high-quality. Usually, banks, large corporations and governments sell these securities to fund their short-term financial needs.
Even though they have some risks, money market funds are still relatively safe for various reasons. First, the institutions that borrow money are usually quite large, and thus less likely to fail and disappear with lenders’ monies.
Second, some of the securities on offer, such as the Treasury bills or CDs, usually have the government’s backing or are insured to some extent. And third, the debt securities are typically short-term, thus reducing the likelihood of losing money. You can always liquidate your investments quickly and invest elsewhere.
You don’t have to lose money when investing in IRAs. To enhance IRA fund safety, opt for safe securities that are easy to liquidate, have some financial backing or insurance and tend to preserve the principal. And remember, the closer you come to retirement, the more you should embrace the safest IRA investments available.
- SEC.GOV: Investor Alert: Self-Directed IRAs and the Risk of Fraud
- Forbes: Self-Directed IRA: Invest In Alternative Assets For Retirement
- Dol.Gov: Types of Retirement Plans
- Sofi: Can You Lose Money in an IRA?
- Investor.Gov: Certificates of Deposit (CDs)
- Annuity.Org: Annuities
- Investor.Gov: Bonds
- Corporate Finance Institute: What Is the Money Market?
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.