 Since IRAs are designed to be long-term investments, and can play an important part in providing a secure retirement, you'll want to have a plan for building your account. The first rule is to diversify, which means spreading the assets in a variable annuity among several different types of separate
account funds. That way you may benefit from owning some investments that are performing well even if other investments are in a slump. And you can protect yourself against the risk of depending too heavily on the return of just one investment category.
One strategy is to use some of your IRA to invest in funds that are designed to provide income. Since it's a
tax-deferred account, you don't have to worry about increasing your current tax bill. And you can use the income to make additional investments.
Another approach is to make riskier investments, for example, in separate account funds that invest in small-company stocks, early in your career and gradually shift the emphasis in your IRA to income-producing investments as you get closer to retirement. If equity investments have a long time to grow, they have the potential to increase in value more rapidly than more conservative investments.
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SAVING ON FEESConsolidating your IRA accounts with a single financial institution can save you money, because you generally pay an account fee of between $10 and $50 to maintain each IRA. But if your money is in just one place, there's just one fee. Some institutions waive the fee entirely if your combined account with them is large enough.
You can let the financial institution deduct the fee from your account, or you can write a separate, tax-deductible check to cover it. If you write a check, your entire investment can go on growing.
KEEPING TRACK OF YOUR IRAS
While you can set up a different IRA every year, keeping track of your accounts can be a nightmare long before you begin figuring your withdrawals. That's another argument for using one institution. You can have several different types of investments, but your records will be on one statement that provides all the information you need.
Since you might have several different types of IRAs in your lifetime - deductible, nondeductible, and Roth - it's especially important to keep good records. For example, you don't want to end up paying taxes twice on nondeductible contributions you've made, as you might if you didn't have records to show their status. The catch is that you probably need to hold onto the paperwork for as long as you have your IRAs.
WHEN TAXES ARE DUEAs important as it is to keep your records straight, consolidating your accounts isn't always the solution. Your Roth IRAs must be held separately from your traditional IRAs, and your deductible and nondeductible accounts should be separate as well. That's because when it's time to withdraw, figuring the tax you owe can be a problem.
For example, if, by the time you retire, you have put $40,000 in IRAs - $16,000 in deductible contributions and $24,000 in nondeductible - and together they've produced $56,000 in earnings, for a current value of $96,000, you must calculate the taxable portion of the lump sum by subtracting the nondeductible contribution from the total value.
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THERE'S A HITCH-OR TWOChances are you aren't going to withdraw your IRA money in a lump sum. That means you have to figure out what percentage of the money that has already been taxed is included in each withdrawal, and compute the tax you owe on the balance. Starting with a $96,000 balance, you can figure out the taxable part of a $3,000 withdrawal in three steps.
1. You find the nontaxable percentage by dividing the nondeductible contribution by the total value of the account.
2. Then you calculate the nontaxable withdrawal by multiplying the nontaxable percentage from step 1 times the amount of the withdrawal.
3. Finally, you subtract the nontaxable amount from the total withdrawal to find the taxable amount.
It won't work to say you're using up the nondeductible portion of your savings first. The IRS says you must treat withdrawals as if they came from all your traditional IRAs proportionally, even if you have always kept the accounts separate and actually withdraw from just one.
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