Beth Pinsker: How to invest your IRA contribution: 3 strategies to fit your mind-set in a turbulent market

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If you just made an IRA contribution to get it in before the tax filing deadline, the first thing to know is that you have to actively do something with the money or it will sit in cash—unlike a workplace 401(k) that’s allowed to have defaults or automatic investments in place. 

Up to 40% of people forget this important step on all types of IRA accounts—traditional IRAs, Roths and rollovers—according to Fidelity. Over time, if you leave the funds in cash, you’ll lose out to inflation. Since IRA savings are meant to be for retirement, you want to get as much growth out of them as you can. 

If you pick a traditional IRA, you may qualify for a tax deduction on your current taxes, and your account will grow tax-deferred. Or you can choose a Roth IRA and pay the taxes upfront and have the growth be tax-free ever after. The IRS contribution limit for both types in 2022 is $6,000, or $7,000 if you’re 50 or older, and that goes up over time with inflation

That might not seem like a huge amount, but the real value is in your returns. At 1% rate of growth—which is actually more than the national average interest rate for savings accounts, according to Bankrate.com—you’d have just $6,627 after 10 years, and who knows what that will actually buy you by then. 

If you make the effort to get 4%, which is closer to the rate of Treasurys, CDs and money-market funds, you’d have around $8,880. 

If you put the money in the stock market and it earns an average return of 6%, you’d likely have $10,745—you might have more, but you also might have less. Would it possibly be less than $6,627? It’s hard to say. It could very well be, especially right off the bat. 

That leads to the big question about your investing personality: How would you feel if you put $6,000 in one day and it’s worth $5,999 the next day (or less)? Your answer will determine the best investment for your psychology. 

“People say, if you’re an early saver, you should be all-in. That’s true, but if it’s your first experience, and you have a bad first six months, some will move out of the market and become risk averse over time,” says Jamie Hopkins, managing partner of wealth solutions at Carson Group. “You might want to take a safer route, just so you experience your money going up.”

Here’s how to proceed based on your mind-set: 

If you’re not even going to look 

You can jump in as soon as the funds clear in your account, which might take two days. Click a few buttons to trade and you could buy a broad-based S&P index fund ( SPX, +0.56% ) and be on your way. “A lot of times, the simplest solution is the best one,” says Caleb Pepperday, a certified financial planner with JFS Wealth Advisors in Pittsburgh. 

You can do some basic research through your financial institution or on the web for the best one for you, but don’t stress too much about the decision. 

“It’s a relatively small dollar amount, over the course of a life, so I think maybe there’s a little more hesitation than might be needed sometimes,” says Pepperday. 

If you need more hand-holding than that, you can always invest in a target-date fund geared to your retirement date, or a managed fund. You can also get financial advice from your brokerage, your employer or an independent professional, although some of that might cost you. For $6,000 it might not be worth paying for advice when you get started, but you quickly could have an amount that’s worth it. 

If you can’t stomach a temporary loss

The stock market has been on a wild ride, and you might not want to incur losses upfront. In that case, you can tiptoe around the edges and still get a pretty good return for now. 

One solution: ultrashort Treasury ETFs.

This gets you into the stock market, nominally, with an exchange-traded fund that contains a basket of Treasurys (BX:TMUBMUSD10Y). And it means you don’t have to manage a complicated ladder of maturities on your own, because the exchange-traded fund will do all that for you. 

“It’s better than most of the money-market funds,” says Hopkins. “They can be traded intraday and have low expense ratios. Yes, they still have some volatility, but they’re generally supersafe.”

If you can’t stand the thought of losing anything

If you’re so risk-averse that you can’t even think about any sort of equity product, even one composed of government-backed instruments, then you need to think about buying Treasurys in your IRA account, or brokered CDs, which often offer higher rates than those bought directly at banks. You can even stick with high-yield money-market funds. Your yield will fluctuate, but for now, you just might beat the market. 

That could be a good short-term approach, but you probably don’t want to stay in that mode forever. In your broader financial life, you have other places to play it safe. You can have an emergency fund in a high-interest savings account, put money into tax-deferred Series I bonds or buy Treasury bills in a taxable brokerage account. 

There’s a difference between this kind of saving to keep money safe and investing to get return for the long-haul. If you’re making the effort to put money aside for retirement in a specially designed account that comes with the advantage of tax deferral, you should make the most of it—at least, eventually. 

“You need to sometimes give people a time period to think it’s working for them, and they can take risks at a later time,” says Hopkins. 

Got a question about the mechanics of investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write me at beth.pinsker@marketwatch.com

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