Guidance

RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

More and more companies have eliminated traditional pension plans, and individual retirement accounts are becoming a cornerstone of many workers’ retirement plans. So it only makes sense to take some time to make sure you are taking maximum advantage of these plans. Follow these strategies and tips to make the most of your IRAs.

1. Start early
Lots of young people (and sometimes their parents) do not realize that they can contribute to an IRA. It is highly advisable to get IRA contributions working as soon as possible. Sooner is better than later because there will be more time for that money to compound over time.

2. Plan which investments to hold in your IRA
A number of factors will affect your “asset location” decisions—which assets to hold in your taxable accounts versus tax-sheltered ones like IRAs. Income-generating assets, such as many bonds, may be better held inside your IRA. Meanwhile, stocks typically generate much less income, and that dividend income is taxed at a much lower rate—generally 15%.1 (Long-term capital gains from stocks enjoy the same rate.) This rule of thumb will not always hold true; if you are young and have a long time until retirement, you will want growth investments (such as stocks) in your IRA.

3. Convert part or all of your traditional IRA to a Roth IRA
The Roth IRA has one huge advantage over the traditional IRA: You never have to take required minimum distributions (RMDs) at any age. And when you choose to take distributions, they are generally tax-free. That is because the Roth IRA requires you to pay taxes up front, either when you contribute the money or when you convert from your traditional IRA to a Roth IRA. And the earnings in that Roth IRA continue to grow tax-free for your beneficiaries after your death. Investors of all income levels are able to convert their traditional IRA assets to Roth assets. It is important to note that those who do elect to make the conversion will have to pay taxes.

4. Stretch out your IRA by choosing the right beneficiary option
One of the biggest benefits of IRAs (and other tax-deferred accounts) is the ability to defer paying taxes until a later date. That allows the full value of your account to compound over time. Many investors choose to keep the tax-deferral advantage going as long as possible. This process is known as “stretching out” the value of your IRA. The longer you can delay paying taxes, the greater the possibility that your IRA will grow to an even higher balance.

As part of your overall estate planning, you will need to think about whom you want to name as your beneficiary. Naming a spouse as beneficiary to your IRA allows him or her to roll over your IRA after your death into his or her own IRA and name a new beneficiary. If you cannot name a spouse as your IRA beneficiary, name a child or grandchild. If you have multiple beneficiaries (several children), consider splitting your IRA into separate accounts, each with one beneficiary.

5. Use your RMDs to rebalance
If you have a traditional IRA, you will need to take annual distributions once you are 70 1/2 years of age. Use those distributions as part of your rebalancing process. Once retired, you should have several years’ worth of expenses in cash equivalents. Withdraw your living expenses from those reserves. Occasionally you will need to replenish those accounts. Use your IRA distributions as part of that process.

Be sure to consult with a financial advisor or tax professional for the latest rules and regulations. Past performance is no guarantee of future results. Stocks are not guaranteed and have been more volatile than bonds.

 

1. The American Tax Relief Act of 2012 (ATRA) created a 20 percent tax rate on net capital gains and qualified dividends of taxpayers subject to the highest income tax bracket of 39.6 percent, to the extent their taxable income exceeds certain thresholds, indexed for inflation.

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