Ask the expert: How risky are IRAs?
September 28, 2010
Q: I want to open an IRA, but I'm confused by them -- how risky are they? Could I lose my money?
A: An IRA can be just about as safe or as risky as you choose to make it, so perhaps the best way to start in answering your question is to explain what an IRA really is.
An IRA (Individual Retirement Arrangement) is a personal savings plan which has certain tax advantages. The conditions governing IRAs are centered around how you can put money into it, what the tax advantages are, and when you can take money out of it. You have a great deal of latitude concerning how you invest the IRA, and that's what determines the risk.
In this sense, think of an IRA as a briefcase -- it is simply a vehicle for carrying your savings. What you put in that briefcase is up to you, and can range from the safe to the dangerous.
You can, for example, use CDs, savings accounts, or money market accounts to fund your IRA. That way, your accounts won't fluctuate in value, and you can even be protected by FDIC insurance (up to $250,000) with participating banks. Your money would be safe, but you would be limited to the best CD rates, savings, or money market rates you could find.
On the other hand, you could invest your IRA in a stock portfolio. You wouldn't have FDIC protection, and your IRA would fluctuate in value. However, you would have the possibility of earning higher returns.
In short, an IRA can work for you whether you decide to take a low-risk approach, a high-risk approach, or something in between. To be safe, you might start an IRA with a low-risk approach so you can start benefiting from the tax advantages, and then add in a little more risk when and if you think it is appropriate.
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