PrintIf you do not have a 401(k) plan available through your employer, an investment retirement account is a popular means of starting a retirement plan. Whether you choose a traditional or Roth IRA will depend on whether you want the tax deduction now or would prefer to withdraw the money tax-free later.
Either way, there are several basic strategies that should be considered as you contribute to your IRA and invest for your retirement years:
1. Don't wait: If you have money that can be invested now, put the money to work in an IRA immediately. The longer the money can benefit from the power of compounding, the more money you will have available for retirement years.
2. Contribute early in the year: If you are looking to claim a tax deduction by funding your traditional IRA, why wait until approaching April 15 of the following year? Make your contribution early in the year.
3. Be proactive: Too many people contribute to an IRA without ever stopping to rethink their investment strategies. Stay on top of your investments and make appropriate changes. Your asset allocation when you are 33 and opening an IRA should be different from your asset allocation when you are 57 and approaching retirement.
4. Consider funds that reallocate for you: If you are concerned that you may not keep up with your investments, consider a target fund. Such a fund is designed to shift money from more aggressive to more conservative investments over the years.
5. Diversify: Investing wisely typically means diversifying across asset classes. Within the equity portion of your portfolio, index funds offer one means of diversifying.
6. Avoid tax-free investments: Since your money is already in a tax-free environment, you will typically not benefit from government or tax-free municipal bonds or bond funds that invest in tax-free instruments.
7. Contribute the maximum: You should try to reach the maximum allowable contribution, which for most people means spreading out contributions throughout the course of the year. Check with the IRS to determine the current maximum IRA contribution allowed.
8. Avoid required distributions: A traditional IRA requires that you start taking distributions once you reach 70½ years of age. If your income is still high from other investments or employment, you'll be losing some of the benefit of tax-free compounding. If you wish to leave money in an IRA longer, you may switch to a Roth IRA, which provides a way to extend the benefits by leaving the money in the account. Review this possibility with your accountant or financial advisor.
9. Buy a home: A special provision of the Roth IRA is that after five years if you qualify as a first-time homebuyer (and meet certain specifications), you can withdraw money tax- and penalty-free.
10. Pay for higher education expenses: Like first-time home buying, qualified higher education expenses are also an exception for withdrawing money from an IRA without incurring a penalty. Therefore, part of an IRA can be used to pay such higher education expenses.
