What an Individual Retirement Account Is and How It's Used

To put real estate in an IRA, you need to find an independent pension administrator. That could be a risky proposition for your retirement funds because unlike banks and brokerages, pension administrators are not regulated. You can also hold U.S. and state-issued gold and silver coins, but you can't put life insurance, art, or collectibles in an IRA.

An individual retirement account have always been a valuable tool when looking towards retirement.

In fact, most people have several IRAs spread among different financial institutions, often, with limited investment options. But instead of trying to manage several IRAs that have accumulated over the course of a career, investors have another option -- an IRA brokerage account.

That IRA account can be set up as a brokerage account where you can trade individual stocks and bonds. An IRA brokerage account allows you to trade in that account without a tax effect on your annual income taxes. That's because taxes aren't paid until the money is distributed out of the account. Distributions are then taxed at your ordinary income tax rate.

There is one tax advantage to holding stocks outside your retirement accounts. Long-term capital gains realized on stock sales in a taxable brokerage account will pay a maximum 20 percent in capital gains taxes. Trying to keep track of several IRAs can be a complicated and time-consuming ordeal.

Consolidating an Individual Retirement Account in a brokerage account can help simplify retirement planning and, at the same time, increase your retirement investment potential. Gifting stock from an IRA would be a perfect way to lower a taxable estate to minimize estate taxes.

Setting Up Your IRA

An Individual Retirement Account allows you to choose from two options, in order to accommodate each participant's specific goals for retirement.

* Option 1 allows you to "mirror" your 401(k) investment selections and is available only to 401k participants. Pan-American Financial Advisers offers "mirror" funds so that you may continue the asset allocation available in your 401(k) plan.

* Option 2 allows you to access a broad range of securities and is available to 401k participants, participants of other 401(k) plans, and individual investors interested in establishing Traditional, Roth, Education, and/or Rollover IRA's. This option offers the ability to work closely with a financial representative to direct and manage your retirement assets and savings.

An illustration: No matter how you take your distribution from a traditional Individual Retirement Account, you will pay income tax at the ordinary earned income rates. So, if you are a single IRA owner who takes $30,000 from the IRA, you're subject to a marginal rate at 28 percent.

If you take your distribution in shares, you are taxed at the fair market value of the shares on the day they are withdrawn from the IRA account.

So, if you withdraw 400 shares of Procter & Gamble on a day they are valued at $75 a share, you would owe regular income tax on $30,000.

Meanwhile, you bought the stock at $20 per share. There are no capital gains and that’s the beauty of IRAs - taxes get deferred. Since it’s in the retirement account, there are no capital gains or cost basis.

But you will be responsible for capital gains as soon as the stock hits your regular brokerage account. The cost basis is set at the fair market value that day - in this example, $75. It's almost as if you sold the stock to yourself on that day.