There's a great deal of financial advice currently available to the public in regard to building a nest egg upon which a future retirement can be built, but much of that information is focused on investing in an IRA. Many people believe that taking that first step will ensure an adequate financial safety net, but that's not always the case. Instead of relying on good fortune to bolster that nest egg, learn how to use that IRA to take a more active part in building your retirement fortune.
Choosing The Right Investments Means Choosing Your Path To Success
While opting for high risk/high yield investments may grow your IRA quickly and effortlessly, The Motley Fool warns that it can also lead to financial ruin without much warning. Instead, it's recommended that a mix of high risk stocks and more conservative investments is the best way to ensure a more likely path to success.
An additional incentive toward picking proven growers comes in the way that the IRS treats investments at tax time. Currently, stock investors can expect to pay a maximum of 15%, while other investments like CDs and bonds are taxed at a rate of 35%.
Of course, that tax break only counts for as long as the stocks remain a part of the IRA portfolio. Once it's sold or money is withdrawn, the account holder can expect to pay that full 35% rate.
Instead, it's recommended that the higher taxed bonds be placed in the IRA account, while leaving stock picks in a taxable account. Even if everything is sold upon retirement, the account holder will still get a tax break and pay less to the government in the long run.
Take Better Control Of Your Retirement Savings
One way to get a tighter reign on your retirement is by opting for a self directed IRA account, though, as Equity Trust shares, that's an option few are aware of outside of the financial sector. While the option to take a hands-on approach has been around just as long as the 1974 launch of IRA accounts themselves, banks and brokerage firms prefer to keep their clients earning a steady revenue with more traditional investments.
Self-directed IRAs are more alluring, because they combine the investor's own knowledge of his/her investments with the power of compounding interest. The freedom of choice and that powerful interest incentive has the potential to create lasting wealth for one's retirement.
One word of warning is offered, however. Before proceeding, investors should familiarize themselves with the rules regarding self-directed IRAs. As with more widely recognized retirement options, the IRS has a complete list of rules governing the participation in this type of investing account.
Once You've Started Making Money - Don't Lose It!
As your retirement nest egg begins to grow, there can be a threat of loss, much as was experienced with the Great Recession of the late 2000s. Time warns that even a modest decline in stock values can result in a gradual loss of modest retirement funds. As much as 10% of one's savings can be lost in the time that it takes to make necessary changes.
Instead, a closer eye and a more protective guardianship of the IRA is recommended. The tendency, which was confirmed with the recession, is to completely withdraw from the market and avoid reinvesting, even after the market has discovered.
This is taking things to the opposite extreme and can be just as disastrous. Instead, ease back on the percentage of stocks in one's IRA portfolio, scaling it back to about 30% to ensure growth, while also limiting loss. As your IRA account experiences growth, gradually increase that up to 60% over the course of 15 years.
Also, eliminate high risk, low yield stocks from the mix. While these kinds of investments have the potential of delivering a big payout, it's far more likely that they won't perform or may even cost the investor considerable capital.
Perhaps consider replacing those junk stocks with high grade bonds. Even in a bear market, these bonds tend to deliver a 5% gain on investment capital.
In the end, growing and maintaining a healthy IRA is the responsibility of the individual, so it's wise to consider all of the advice available from unbiased sources. A healthy mix of caution and risk ensures an ability to grow that retirement nest egg, while limiting the possibility of significant loss.