Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Where to invest your IRA money

Dear Dr. Don,
When you open an IRA account at a bank or credit union, do you have to select how to invest your money? Meaning, do you choose a mutual fund, stock, etc.? Or is it a set investment?
Brenda Bewildered

Dear Brenda,
Investing an IRA contribution requires you to allocate the investment between stocks, bonds and cash. These terms are really shorthand for classes of investment. Stocks are fractional ownership of a corporation. Bonds are loans with a term or maturity of more than a year and cash is a short-term loan with a term or maturity of less than a year. A term bank deposit, or certificate of deposit, can be classified as either a bond investment or a cash investment based on the CD's maturity.

You have a lot of choices when deciding where to open an IRA account. When investing at a bank, keep in mind that IRA CDs are FDIC insured while IRA accounts opened with the bank's financial services group are not insured deposits. (Credit unions have their own deposit insurance fund.)

You can open an IRA account with your bank, your bank's financial services group, a brokerage firm, a mutual fund group or even an insurance company. Choose between them based on what type of investments you're considering, how much you'll pay in fees and expenses, and the level of advice or service you require. You can shop rates for IRA CDs on Bankrate.

Mutual funds can invest in stocks, bonds or cash. A money market mutual fund invests in cash investments. Bond or stock mutual funds invest in the named asset class. Hybrid funds invest in some combination of stocks, bonds or cash. In general, the longer you have until retirement the more willing you should be to take on the volatility (risk) associated with investing in stocks. If you're unsure about how to invest you should discuss your investments with a financial planner.

It's a good time of year to consider where you're going to fund your 2002 IRA contribution. It's an even better time to consider where you'll fund your 2003 IRA contribution. People that wait until April 15 are losing up to a year and a quarter's worth of potential investment returns.

While it's true that in some years, like this year, waiting to fund a stock investment in your IRA account actually makes you money by avoiding losses on your stock investments over the first year, it's a better practice to fund the contribution earlier in the tax year rather then at the last minute.