Fit IRA

Guidelines to make sure your IRA is as fit as possible Regular exercise and a proper diet can be the foundation for a healthy body. Similarly, tax-advantaged saving in an Individual Retirement Account can be the foundation for healthy finances in retirement. To make sure your IRA is as fit as possible, regular maintenance and good habits are required. Here are a few guidelines.

1. Give your IRA the proper diet. Advisors recommend regular, consistent, and maximum contributions to an IRA, even when they are not tax-deductible. Whether tax deductible or not, contributions to an IRA grow tax-deferred, meaning that no taxes are due on the earnings until money is withdrawn. This deceivingly simple factor—tax-deferred growth can have a dramatic impact on your retirement savings over time.
2. Exercise all available tax options. Having made the point about the power of tax deferral, it is still important that, whenever possible, IRA contributions be used as a tax deduction. Because there is confusion over the laws, people often incorrectly assume that they are not eligible for a tax deduction when they are.
3. Know the rules. Each person under 70½ may contribute up to $3,000 per year (even married couples where one spouse doesn’t work outside the home.
4. Disciplined record keeping. When non-deductible contributions are withdrawn from an IRA, they are tax free. For this reason, it is important to keep track of them. In a separate file, maintain a list of contributions. If you wait too long to compile this information, you're bound to make mistakes and end up paying more taxes than necessary.
5. Invest wisely. Once you have made your IRA contribution, you must make decisions about how this money will be most effectively employed. Seek the counsel of a professional Financial Advisor to assist you with the management of IRA assets.
6. Regular checkups. Personal, economic, and market conditions change over time so it is important to monitor these factors, since they may suggest adjustments or modifications to your investment selections. A self-directed IRA allows you to use virtually any investment vehicle and make appropriate changes as needed.
7. Resist bad habits. You’ve spent a lifetime building a retirement nest egg in your tax-advantaged retirement plan. Don't consider this money a windfall to be spent on a new car or boat you've always wanted. Tax-deferred retirement dollars cannot be replaced. If you change jobs or take an early retirement, it is critical that you resist the temptation to take receipt of the money in your retirement account. Rolling the sum into an IRA rollover account is almost always the wisest alternative. You’ll be glad you did when retirement comes because a disciplined “hands-off” policy during the accumulation years, can make a substantial difference in your lifestyle during retirement.
8. Learn about rollovers before you effect one. New rollover rules for retirement distributions are fairly straightforward, but it is important to understand them completely; a wrong move could cost you a sizable portion of your savings. Talk with your Financial Advisor and tax advisor well in advance of your retirement distribution.
9. Consolidate your IRAs. Many people have several IRA accounts at a number of different financial institutions. While most are in this situation completely by accident, some do it intentionally because they mistakenly believe it will provide diversification. Since most IRA accounts incur fees and other expenses, having several different IRA accounts will only result in defeating the long-term goal of accumulating assets. And while diversification is an important element of good money management, it is not necessary to have a number of different accounts to accomplish it. One, self-directed IRA account can handle several years of contributions and several types of investments.
10. Plan the withdrawals. Deciding when to begin withdrawing from your IRA and who to name as the beneficiary are important in your overall estate plan. Many times an IRA is your largest asset. If your IRA is sizable, potentially subjecting you to a future 15% tax on large withdrawals, or your heirs to additional estate taxes, is it better to start withdrawing now or let the funds grow tax-deferred? Who should be your beneficiary—your spouse, a child or grandchild, or your trust? The optimal solution must be based on your particular situation and should be discussed in depth with your tax and estate planning professionals.

Emily S Hazlett is Vice-President:Investments at ENB Insurance Agency, Inc. a wholly owned subsidiary of Evans National Bank.

Our firm does not provide tax or legal advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences.