The Pros And Cons Of Including Oil Investments In Your IRA

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When you build your IRA, it's important to include a wide range of investments. Diversity, after all, helps protect you from risk. One type of investment you may be thinking of including is an investment in the oil industry. As with all investments, there are pros and cons of this option.

Pro: When the oil industry does well, the returns are huge.

Many oil investments are in new wells. You and others invest the money, and then the company uses that money to drill a new well and access an oil reserve. As long as the well is actually drilled as intended, there will be a lot of oil to sell and a lot of money to be made -- so the return on your investment could be very high. If the well is a good one, it could keep producing oil for a decade or more, so your profits will be ongoing.

Con: Wells can take a long time to develop.

It can take companies a long time to drill a well, let alone begin harvesting oil from it. There are a lot of regulations that the drilling companies need to comply with, and their efforts to meet these regulations may mean the the "building" phase lasts for far longer than is planned. As such, you can't really rely on companies' estimates of when wells will be completed. If they say drilling will be complete in 2020, you may still be waiting in 2022. This unpredictability isn't a huge problem if you have decades until retirement, but it could thwart your retirement plans if you are planning to start drawing money out of your investments in a few short years.

Pro: There are tax advantages to investing in oil.

Since the government benefits from the drilling of new wells, they offer tax incentives for those who invest in this industry. For example, you can usually consider 15% of your share as non-taxable income. Talk to a financial expert to learn the tax benefits of the particular oil investment you're thinking of making. 

Con: Finding reputable oil investments can be tough.

The oil industry is big and diverse. There are the classic companies that have been around for years, and then there are smaller newcomers. With so many options, it's so hard to tell which companies are reputable and smart to invest with. Read lots of reviews and talk to a lot of companies before you make a decision.