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By Jason Stipp | 03-22-2012 01:00 PM

What to Put in Your IRA

Morningstar's Christine Benz outlines the broad investment types most suitable for individual retirement accounts, as well as some of our favorite names.

Jason Stipp: I'm Jason Stipp for Morningstar.

Investors have until April 17 to make contributions their IRA plans, and some may be wondering just what to put in and maybe what not to put in.

Here with me to offer some ideas as well as some specific investment names is Morningstar's Christine Benz, our director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So, Christine, investors do have until April 17 to fund these accounts for the 2011 tax year. What's the maximum amount that they can put into these accounts, and what's the benefit of using these accounts? Why should investors think about placing assets into them?

Benz: So, the first question, the maximum contribution is $5,000 if you are under 50, $6,000 if you are over 50, and really the advantages you get depend on the type of IRA that you choose. If you are opting for a traditional IRA, the key benefit that you get is tax-deferred compounding on your money, so you won't have to pay taxes from year-to-year on any assets that you hold in those accounts.

If you opt for a Roth IRA or do a backdoor Roth IRA, which I know is a popular concept among many investors right now, you are getting tax-free withdrawals in retirement as well as that tax-deferred compounding, so kind of a double benefit there.

Stipp: So, given that you do have that tax advantage, there are probably some assets that are better to place in these IRAs. What are those? Broadly speaking, what kinds of asset classes should we think about for IRAs?

Benz: Well, the starting point, I think, for a lot of investors [is bonds]. We are all getting older year-by-year, and a lot of people might look at their portfolios and say, "I'm light on bonds, probably, relative to where I should be, given my age."

So, bonds are a great addition to an IRA, because the income you receive from bonds is taxed at your ordinary income tax rate, and so it's beneficial to tuck them inside of an IRA, where you're not having to pay taxes as the years go by on that bond income.

Stipp: If I'm looking for a good core diversified bond fund, do you have any ideas there?

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