People often confuse an IRA with an IRA investment. An IRA, or Individual Retirement Account, is a tax shelter for retirement savings. Any earnings from an investment in a traditional IRA grows tax-deferred, and the contributions to the IRA are tax deductible up to certain limits. An IRA investment is what the IRA tax shelter is invested in.

The IRA Itself

The IRA investment can be any vehicle, from a certificate of deposit to mutual funds to government bonds. If the investment is held as part of an IRA, then it grows tax-deferred; if the investment is held outside of an IRA, then the growth or income is probably taxable. Deciding which IRA is best depends on what is meant by best: Is the questioner referring to the IRA itself, or the IRA investment? Certain criteria are used to evaluate the IRA, while other criteria are used to evaluate the IRA investment. If the question refers to the IRA itself, then look at the costs, set-up and access.

Costs, Set-Up and Access

Costs for an IRA range from set-up fees, maintenance fees, or management fees. Ask the company directly, "How much of my money will you take if I have my IRA with you?" Choose a company who offers low fees, but remember that sometimes, you get what you pay for. Don't shop strictly on price, but consider the historical performance of the company's investments. An IRA that charges a 1 percent management fee and earns 5 percent is better than an IRA who charges no management fee but earns only 3 percent. Set-up refers to how easy the IRA is to establish. Do you understand the procedures for creating the IRA? Are the company's personnel helpful and courteous and give you the information you need? Is the company asking for something you can't provide, like a minimum investment of 100 grand? Access refers to how easy it is to get information about your IRA, and how easy it is to invest in your choice of vehicles. Does the company have a website showing your portfolio? Does the company allow you to invest in everything that you want, from stocks to bonds to CDs to money-market accounts?

The Investments

If the question refers to the investment, then all the traditional investment questions apply. The answer to the question, "Which investment is best?", depends on the current state of the market and economy, your personal financial situation, your age, your willingness to take risks, your potential for future earnings, and many other unknown factors. Unfortunately, the best investments can only be determined in hindsight. Stocks historically produce much higher return than bonds, so it's easy to understand that holding stocks from 1980 through 2000 would have earned 14.55 percent per year. What's amazing is that holding stocks from 1930 through 1951 would have earned 0 percent. That's right: Zero. So the right investment for one time is the exact wrong investment for another time. Despite this, there are some rules you should follow.

Investment Rules

First, invest regularly. Set money aside with every paycheck. Get used to being without that money. Second, each year, increase the amount that you invest for the IRA. Start at two percent of your gross income and go up one-quarter of a percent every year, to two and a quarter, then two and a half, increasing one quarter each year. Third, diversify your investments, that is, invest in many different vehicles. Choose some safe investments, such as CDs and government bonds, some middle risk investments, such as corporate bonds and stocks of large companies, and some risky investments, such as stocks of smaller companies. Fourth, watch your investments closely. Figure out how much your investments increased or decreased over the past year and change your investment mix based on any new information you have. Talk to others investors, both amateurs and professionals. Think about the big picture. The major goal is to have money available to you for retirement.

Source:

Historical stock charts

Resource:

Investing basics