One of the most common investments investors own is the IRA (Individual Retirement Account). When the IRA was created back in the 1970s, the investment choices within the IRA were very limited – primarily CD (certificates of deposits) and passbook savings accounts. Fast forward the clock 40+ years and the investment choices are significantly larger. Investors can now place their IRAs into the traditional Wall Street investments, such as stocks, bonds, mutual funds, exchange traded funds, annuities and even various aspects of real estate.
With so many investment choices, you may be confused and frustrated as to how you can invest this retirement account. More importantly, you may not know where to begin in order to administer the portfolio and revive it. If you have suffered a decline, these 7 strategies will guide you on how to revive your IRA.
What is an IRA?
An Individual Retirement Account (IRA) is a retirement plan account that provides some tax advantages for retirement savings in the United States. Combined with potential tax savings at the time of contribution, IRAs can prove to be very valuable tax management tools for individuals. Also, depending on income, an individual may be able to fit into a lower tax bracket with tax-deductible contributions during his or her working years, while still enjoying a low tax bracket during retirement.
How is an IRA Funded?
• An IRA can only be funded with cash or cash equivalents. Attempting to transfer any other type of asset into the IRA is a prohibited transaction and disqualifies the fund from its beneficial tax treatment.
• Rollovers, transfers, and conversions between IRAs and other retirement accounts can include any asset.
• The maximum for an IRA contribution in 2014 is 100% of earned income or $5,500, whichever is less, for an individual under the age of 50. Individuals aged 50 and older can contribute up to 100% of earned income or $6,500 whichever is less.
• This limit is for Roth IRAs, traditional IRAs, or some combination of the two. You cannot put more than $5,500 into your Roth and traditional IRA combined ($6,500 for individuals aged 50 or more).
For example, if you are 45 and put $3,500 into your traditional IRA this year so far, you can either put $2,000 more into your traditional IRA or $2,000 in your Roth IRA. There may be an additional administrative step needed so that the trustee which holds the IRA proceeds actually retitles or transfers the $3,500.
Now that you have a thorough understanding of the internal workings of an IRA, let’s explore 7 strategies to revive your IRA.
1. Create: Create a growth plan and determine how many years you have to invest and what value the IRA needs to be at by a specific date, i.e. retirement.
2. Analyze: Analyze the current holdings and ask if they are commensurate with the current market and economic conditions. If they are not, consider making changes.
3. Assess: Assess your risk level. Is your portfolio’s volatility causing you sleepless nights or are you comfortable with the fluctuation? If the volatility is too much, it may be time for a change.
4. Research: If you suffered losses, investigate why. Were they due to weak overall economic conditions or poor investment selection?
5. Diversify: Allocate, allocate and allocate. In real estate, they say location is everything. When it comes to investing, allocation should be at the top of your list. Make sure you own investments that are not correlated to your other investments.
6. Monitor: Monitor your performance on a regular basis. The larger the IRA, the more frequent your monitoring should be. A good rule of thumb is to review your account at least once per week.
7. Contribute: Fully fund your IRA each year, to the maximum contribution limits, if you are eligible.
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