Making the Most of Your IRA

As the responsibility for retirement savings shifts from the employer to the individual, it is important to take every opportunity to maximize the potential of your IRA. Here are some tips to get you headed in the right direction:

Start saving early. Too often in life we procrastinate. Start saving early for retirement to realize the benefits of compounding. You can invest up to $5,500 per year ($6,500 if age 50) in a traditional or Roth IRA. It is best to make contributions early in the year so that compounding has more time to work, although you can make the contribution up until it’s time to file your tax return.

Automatic Contributions. Don’t let human nature get the best of you. You may have good intentions, but get distracted by life events. Set up your accounts to receive automatic investments—you’ll be glad you did.

Decide which investments you will put into your IRA. If you have a 401(k) with limited investment options, you may use your IRA to balance out your total retirement portfolio. When possible, consider rolling over your 401(k) into an IRA—your investment options will increase greatly. Investments that you might not want in a taxable account may work well in an IRA. Remember, even interest and dividends are tax-deferred inside of an IRA. If you want help, a financial advisor can give you advice on the best way to structure your IRA.

Convert to a Roth IRA. Consider the possibility of converting at least part of your traditional IRA to a Roth IRA. A Roth IRA may be a better fit if you think your taxes will be higher in retirement. Although Roth IRAs are funded with after-tax dollars, they are designed to provide tax-free investment returns. However, when you convert your traditional IRA to a Roth IRA, you do have to pay taxes on the conversion amount. You may want to convert some of your traditional IRAs now, and convert some later to spread the tax burden over several years. Another advantage of the Roth IRA is that you do not have to take required minimum distributions (RMDs) which are required in traditional IRAs at age 70 ½. Finally, Roth IRAs provide estate planning opportunities as inherited Roth IRAs are not generally subject to income taxes.

Spousal IRAs. Here is another opportunity to create a tax-deferred investment. Even if your spouse does not have earned income, they are eligible to start an IRA. The working spouse needs to have enough earned income to cover the spouse’s contribution.

Required Minimum Distributions (RMDs). Traditional IRA owners are required to take annual distributions from their account once they reach age 70 ½. Do not overlook this requirement—the IRS imposes a 50% penalty on the money you should have taken!

Stretch IRAs. A stretch IRA is a term used to describe an IRA designed to “stretch out” or defer taxes as long as possible—possibly over multiple generations. Naming your spouse as your beneficiary allows them to roll over your IRA into their own IRA after your death, once again deferring taxes. A child or grandchild may also be named as beneficiary to help defer IRA earnings. Discuss the value of compounding and deferring taxes with your heirs so they, too, can make wise decisions.