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5 Questions Every IRA Owner Should Ask


President Obama recently released his proposed $3.8 trillion budget for 2013, and one thing is crystal clear: taxes are going up.

Faced with a $1 trillion national deficit, Obama plans to raise taxes on such items as dividend income, capital gains and, yes, even individual retirement account \(IRA\) contributions for couples making at least $250,000 and individuals earning at least $200,000.

While no one can predict which of Obama’s proposals will actually make it through Congress, this should serve as a wake-up call for everyone who owns an IRA. Many people don’t realize that IRAs are not set-it-and-forget-it retirement vehicles. They need regular tune-ups to make certain they are producing enough to fund your retirement goals. Now is the time to sit down with your financial advisor and ask these five questions to make sure your IRA is running at full throttle.

1. How can I make the best use of my IRA?

Think of your IRA as the primary account for most of your tax-deferred retirement funds, including money invested in defined contribution plans (e.g. 401(k) plans) sponsored by any and all of your former employers . Consolidating that money into one IRA could turbocharge your retirement plan.

Keeping assets in a prior employer’s 401(k), 403(b), or similar plans when retiring or changing jobs is not uncommon; surveys since 2008 show that roughly one-half to two-thirds of all the funds in such plans may belong to employees who have moved on. Individuals leave these assets behind to eliminate the hassle of dealing with the tax rules or paperwork of transferring their money or picking new investments for their plans. However, if you do leave money behind, you may be missing out on extra retirement income.

With your money stuck in a former employer’s plan, your investment choices and payout options are restricted to what the employer plan offers. As a result, you may sacrifice flexibility in building the best asset allocation for your total retirement portfolio (i.e. IRAs, employer plans and taxable assets). You may also be losing control of planning your retirement income and protecting your retirement assets from market downturns.

Ask your financial advisor about consolidating these assets in a Rollover IRA with a provider that offers a wide array of publicly reported investment options. You will gain greater control of asset allocation, risk assessment and retirement income planning.

2. Between low interest rates and stock-market volatility, the value of my IRA isn’t growing. What can I do about that?

Consider adding investments in asset classes that generally do not move in lockstep with U.S. stock and bond markets. These are also known as low- or non-correlated assets, such as real estate (domestic or global), foreign securities, or oil and gas investments. Many mutual funds and ETFs invest in these asset classes and may offer a cost-effective way to diversify a portfolio. Of course, these investments have risks, but may also give you current yields or growth that partially offset the volatility of U.S. stock and bond markets.

Not every IRA custodian or provider has the ability to track and report the value of non-correlated assets. Ask your advisor to help you find one with this capability.

ARE YOU PAYING TOO MUCH FOR YOUR IRA?

3. Am I paying too much for my IRA?

To diversify their IRAs, many people select multiple investments from more than one provider (for example, a bank and a mutual fund company). But be aware that each provider may charge an annual fee for the administration of the IRA, plus other expenses, and deduct the fee from the IRA balance. A single, annual administration fee may do little harm to your IRA’s total return. But the cumulative effect of paying fees to multiple providers over several decades will likely have a more significant impact.

Ask your financial advisor how you can keep your opportunities for diversification but reduce your IRA expenses by consolidating your IRA investments on a one-fee-for-all investment platform.

4. What does my age mean to my IRA?

Like many investments governed by federal tax rules, IRAs are age-sensitive. You can save tax dollars and potentially increase your income by knowing what the rules allow or require. Ask your financial advisor to discuss the age-based rules that may affect you, particularly at ages 55, 59½ and 70½. This can be important in your fifties and sixties, as you prepare to transform your IRA from a vehicle for saving and investing money for retirement to a source of retirement income.

5. Should I consider a Roth IRA?

Roth IRAs may be the best example of why it is valuable to tune up your IRA periodically.

Roth IRAs offer the potential for tax-deferred growth of your investment as well as the possibility of tax-free retirement income or bequests to heirs. However, income from traditional IRAs is fully or partially taxable to you and your beneficiary.

Originally, only those with incomes below a certain threshold could fund a Roth IRA, either by contributing money or converting a traditional IRA. Beginning in 2010, income limitations were removed for converting from a traditional IRA to a Roth IRA. Now anyone can take advantage of a Roth IRA conversion. If your income is above the threshold for direct contributions, you have the opportunity to fund a Roth IRA by converting a traditional IRA.

Ask your advisor to explain the newest rules for Roth IRAs and how you can take advantage of them.

About the Author: Robert Cirrotti, Head of Retirement Solutions and Education and Health Savings Products, Pershing LLC, a BNY Mellon company

Disclosure: Pershing LLC does not provide tax or legal advice. This article is intended to provide general information. Clients should be advised to consult with a legal or tax advisor about their individual situation before implementing any strategies described or establishing and maintaining a retirement account.

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