Do
Think of the IRA as a way to take control of your finances amid an unpredictable market
You know that old saying about having the wisdom to know what you can and can't control? Well, you can't control the market's ups and downs, but you certainly can make sure that your investments are as good as they can be, that your investment costs are low and that you're taking advantage of every tax-sheltered opportunity available, such as contributing to an IRA.
Evaluate whether a conversion from a traditional IRA to a Roth makes sense
Starting in 2010, investors of all income levels will be able to make the conversion and will also be able to spread the corresponding tax hit over 2011 and 2012. To determine whether such a conversion is worth your while, consult with your financial advisor/tax specialist.
Bear in mind your overall asset-allocation plan
Size up your whole portfolio's stock/bond/cash mix and take note of any big sector or style biases; also note any gaping holes in your portfolio. You can also compare your portfolio with a target-date fund designed for someone in your same age range. If you find that you need to add to your holdings in a certain asset class or investment style, your IRA is a logical place to start.
Use an IRA calculator
These tools (make sure they are on a trusted and reputable web site) can help you identify the IRA type that you're eligible to contribute to and will allow you to maximize your return once taxes are factored into the equation.
Don’t
Forget about your spouse
Married couples that include a working and nonworking spouse can maximize their after-tax results by setting up IRAs for both individuals. A so-called spousal IRA is an option as long as you file a joint return and the working spouse has earned enough qualifying income (be aware of limitations) to fund both his or her own IRA and that of the spouse.
Assume that you need a lot of cash on hand to invest in an IRA
A strategy, called dollar-cost averaging, is a systematic way of investing equal dollar amounts at predetermined times. It allows an investor to purchase more shares of an asset when the price is low, and fewer shares when the price is high. It also makes an IRA a more-affordable option if you don't have the full contribution amount on hand.
Assume that you don't need to contribute to an IRA if you already contribute to a 401(k)
If you're maxing out your 401(k), you should consider an IRA as well because IRAs can help you diversify the tax treatment of your retirement assets. For example, if you're contributing the max to your 401(k), you'll owe taxes on a considerable amount of assets when you retire and begin tapping the assets. Withdrawals on Roth IRA assets, meanwhile, will be tax-free. By hedging your bets among the two vehicles, you have less riding on a wager about whether tax rates will be higher or lower in the future; you also maximize your tax-deferred savings.
Shelter investments with tax benefits inside an IRA
IRAs already offer tax-deferred (or in the case of a Roth, tax-free) compounding, so there's no need to stash tax-advantaged instruments like municipal bonds within them. Save those for your taxable accounts and consider IRAs only after you've maxed out your tax-sheltered options.
Be sure to consult with a financial advisor or tax professional for the latest rules and regulations. Stocks are not guaranteed and have been more volatile than bonds. Municipal bonds may be subject to the alternative minimum tax and state/local taxes, and federal taxes apply to any capital gains distributions. Neither Transamerica Retirement Management, Inc., Transamerica Financial Advisors, Inc., their affiliate companies nor their representatives give tax or legal advice. Please consult with your own tax and legal advisors.
SecurePath by Transamerica is a service of Transamerica Retirement Management, Inc. (TRM). TRM is a marketing unit of Transamerica Life Insurance Company and Transamerica Financial Life Insurance Company. Securities are offered through Transamerica Financial Advisors, Inc. (TFA), member FINRA, SIPC and Registered Investment Advisor. Insurance products are underwritten by the insurers and offered through InterSecurities Insurance Agency, Inc., which is licensed in most states, and agents associated with TFA. All are AEGON companies.
©2009 Morningstar. All rights reserved. Used with permission.
