How Best to Allocate an IRA

Allocating your individual retirement account depends on your stage of life, so allocation changes over the years. When you have decades left of working life before retirement, you can afford aggressive choices in your IRA portfolio. As the golden years approach, you'll want to be more conservative, as you no longer have the time to wait for your investments to recover if the markets swing south for a while.

Starting Out

When you are just getting started, you might find that only a few type of investment vehicles, such as money market accounts or certificates of deposit, allow you to open an IRA with a small amount of money. Mutual funds investing in stocks generally have greater long-term growth than CDs or money market accounts but require minimum investments of $2,500 or more to open an account. You can start out with a bank account and when your funds reach a certain level, you can transfer them to a stock mutual fund. As of the time of publication, you can put up to $5,000 annually in an IRA as long as you make that much in earned income. If you are over age 50, you can add another $1,000 annually as a "catch-up" IRA.

Stocks and Mutual Funds

If retirement is still many years away, allocate the bulk of your portfolio to common stocks through a brokerage fund or mutual funds investing in those stocks. You might want to spread your investments to international stocks, sector stocks such as technology or health care or other investments with greater risks but also a greater potential for returns. Keep approximately 75 percent of your IRA holding in equities until you are about a decade away from retirement, when the portfolio should include more fixed-income assets such as CDs and short-term bonds.

Target Retirement Funds

If constant research on investing isn't your thing, consider the target retirement funds offered by most major mutual fund companies. These funds do the reallocation for you, based on your projected retirement date. The aim of the target funds is to provide growth in the earlier years and stability as retirement nears.

Tax-Free Investments

Roth IRA contributions are made with money on which you already paid taxes. If you want to make withdrawals after reaching age 59 1/2, those withdrawals are not subject to tax. Traditional IRAs are not taxed until you begin withdrawals in retirement, usually in a lower tax bracket than during your working years. Because of this, there is no point in using IRA money to invest in something that is already tax free, such as certain types of municipal bonds.