The April 15 deadline to make your 2013 individual retirement account contributions is fast approaching, and competition for your IRA dollars is intense. This is big business for the financial services firms. An IRA can be a very effective retirement planning tool. Here are four tips for choosing an IRA provider and for getting the most out of your IRA investment.
1. Understand how much this will cost you. Some firms may charge you a fee just for the privilege of having an account with them. This might be on the order of $25 or $50 per year. If your balance is relatively low, this can be a significant amount. Often these fees are based on the size of your account.
It is also important to understand any and all transaction fees. These might include trading fees for buying and selling stocks, exchange-traded funds, or other exchange-traded investment vehicles. Some mutual funds might also carry transaction fees as well.
If you are working with a commission-based financial advisor, understand how he or she is compensated. Will the funds in your IRA account carry sales charges or high internal fees to compensate them?
2. Is this custodian a good fit with my investing needs? The fees mentioned above are part of this. Beyond the costs, look at how you invest and the type of investment vehicles in which you invest.
For example if you prefer ETFs, does this custodian offer any commission-free ETFs? If so, would you want to invest in these ETFs?
If, for example, you were planning on using Vanguard mutual funds exclusively, it might make sense to house your IRA there. On the other hand, if you were looking to use funds from a variety of families, perhaps a custodian that is more of a fund supermarket, like Charles Schwab or Fidelity, is more appropriate for you.
Beyond your IRA account, is this custodian a good fit for your needs in terms of other types of accounts and services? If so, it might make sense to move other accounts to this custodian to take advantage of any "buying power" you might get by having more assets with them.
Beyond selecting a custodian for your IRA account, the main considerations in choosing to use an IRA are :
3. How does an IRA fit with my retirement planning strategy? An IRA can be a great tool in your retirement planning strategy. If someone has access to a 401(k) or similar workplace retirement plan, I generally suggest they contribute at least enough to capture any employer match offered. This is true even if their 401(k) plan is lousy.
It makes sense to contribute more than the amount needed to receive the match if your employer's plan offers a menu of low-cost solid investment choices. Although 401(k) plans receive a lot of bad press, there are many excellent plans out there. One advantage to investing for retirement via a workplace retirement plan is the salary deferral feature. This makes regular savings and retirement investing painless.
An IRA can be a great retirement savings vehicle in a number of situations:
-- You don't have access to a retirement plan via your employer.
-- You have maxed out your contributions to your 401(k) and want to make additional retirement contributions.
-- You are a non-working spouse and your working spouse makes at least enough income to cover the amount of your contribution.
-- You are self-employed. Note there are a number of additional retirement plan options for the self-employed including a Solo 401(k) and Simplified Employee Pension IRA, or SEP-IRA.
-- You are looking to roll over your 401(k) after leaving a job and also possibly to consolidate several old 401(k) plans in one place to make managing these assets a bit easier.
4. Make sure to treat your IRA as a part of your overall investment portfolio. Beyond choosing where to locate your IRA, the cost of opening and maintaining the account, and similar considerations, it is vital that your IRA is managed as part of your overall investing and financial planning strategy.
I've seen far too many people manage various accounts such an IRA or a 401(k) as a separate entity unto themselves. The better approach is to look at all of your tax-deferred and taxable investment accounts as part of an overall portfolio. Ideally, your investment strategy will be an outgrowth of your financial plan. This approach helps you to focus on your overall asset allocation, the level of risk you are assuming, and most importantly where you stand in relation to your retirement savings goal.
Roger Wohlner, certified financial planner, is a fee-only financial advisor at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations and endowments. Roger is active on both Twitter (@rwohlner) and LinkedIn. Check out Roger's popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments and retirement plans.
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