Here's What Happens When You Invest Your IRA in Stocks

It's important to save consistently for retirement so you're not overly reliant on Social Security to pay your senior living costs. And to that end, it pays to save for your senior years in an account that will offer you a tax break along the way.

With a regular brokerage account, for example, there are no tax benefits to be reaped. The money you put into that account won't serve as a tax break, and you'll be liable for capital gains taxes each year you sell investments at a profit.

With a traditional IRA, the money you contribute toward retirement savings goes in tax free. So if you put $3,000 into an IRA this year, that's $3,000 of income the IRS won't tax you on.

Also, traditional IRAs get to enjoy tax-deferred gains. That means you don't pay taxes on investment gains until you take withdrawals.

It's a good idea to invest your IRA in stocks so your money gets an opportunity to grow nicely. Though there are risks involved, they're generally worth taking on for the upside involved.

When your investments generate a strong return

Some people worry about investing their retirement savings in stocks -- namely because they don't want to bear losses. Unfortunately, there's no guarantee that you won't lose money by investing your retirement savings in stocks. The stock market could crash repeatedly, leaving you in a real jam.

But if you give yourself a longer investment window, you're less likely to end up losing money in stocks. That's because the stock market has, historically, rewarded investors who have stuck with it for the long haul.

Case in point: Over the past 50 years, the stock market has delivered an average annual 10% return before inflation, as measured by the S&P 500 index. But don't take that to mean that the stock market did well every single year during that time. There were several years when the index ended the year with a loss. Rather, that 10% accounts for the market's overall performance.

With that in mind, let's say you put $3,000 a year, or $250 a month, into your IRA over a 40-year period. If your investments leave you with an average yearly 10% return, you'll end up with a savings balance of over $1.3 million. Now that could set the stage for a very nice retirement.

It pays to take some risk

Investing in stocks is by no means risk free, whether you're doing so for retirement or to meet another goal. But if you don't invest your IRA in stocks, you'll run another risk -- not building up enough of a nest egg to meet your retirement goals. So it pays to push yourself outside of your comfort zone and rely on the stock market to grow your retirement nest egg.

In addition to giving yourself a lengthy investment window, you can mitigate your risks by diversifying your stock holdings within your IRA. That could mean owning stocks across a range of market sectors, loading up on S&P 500 ETFs, or a combination of both.