How to Maximize Your IRA


With all the new tax laws and the variety of IRAs available, it pays to ask yourself some simple questions when setting up, rolling over, or consolidating these powerful retirement vehicles, writes Bob Carlson of Retirement Watch.

The amount of money in IRAs is climbing. Most of us have at least one IRA, and eventually many people roll over their main retirement assets, 401(k) accounts, to IRAs.

Unfortunately, a lot of the value in IRAs isn’t being maximized. People don’t focus on the key strategies that can make an IRA more valuable in their lifetimes and beyond. You won’t benefit from each of these strategies, but you should consider them and decide which will increase the value of your IRA.

Own the Right Assets
An IRA has the advantage of tax deferral. Gains and income compound free of taxes until they are distributed. Unfortunately, they have the disadvantage of converting long-term capital gains into ordinary income. All taxable distributions from a traditional IRA are taxed as ordinary income.

My research reveals that assets that pay high ordinary income are best held in IRAs. These include high-yield bonds, real estate investment trusts, and investment grade bonds. Also, stocks, mutual funds, and other investments that tend to be owned for less than one year generate short-term capital gains and are best owned through an IRA.

Investments that generate long-term capital gains, such as stocks and mutual funds held for more than one year, should be owned in taxable accounts. However, you also can own nontraditional assets in an IRA, such as real estate, small business interests, gold, and master limited partnerships.

There are tax consequences to these investments, and some are prohibited in IRAs.