IRAs can be an excellent way to save for retirement, but they’re not exempt from stock market crashes.
There are steps you can take to keep your IRA from losing money, such as diversifying your portfolio, investing in suitable investments and regularly rebalancing it. Consult a financial and tax professional prior to withdrawing any funds from an IRA.
Diversify your IRA portfolio
Your IRA investments may fluctuate – that’s only natural! By diversifying your IRA portfolio, however, you can help protect it from falling too drastically.
Diversifying means spreading out your investment dollars across various asset classes and individual investments. For instance, it would be prudent to invest in various stocks and bonds as well as market sectors.
Target-date funds offer one effective strategy to achieve this. These funds adjust their mix of stocks, bonds, and cash over time to match your retirement date – an attractive feature among young investors and an efficient way to diversify IRAs.
Diversify your IRA further by investing in alternative assets, such as precious metals, tax liens or real estate. However, it’s essential that you know which investments belong in which IRA. For instance, dividend-paying investments such as stocks may be held within a Roth IRA as these distributions won’t be subject to normal income rates when taxed out later on.
Invest in suitable investments
Investments held in an Individual Retirement Account can become valueless if the stock market declines, so it is wise to diversify your portfolio across asset classes rather than placing all of your money in one asset class. Furthermore, it should avoid high-risk investments such as derivatives and options trading within an IRA account.
IRAs allow you to invest in various securities, including stocks, mutual funds, ETFs and property. Unfortunately, however, certain forms of investments such as collectibles and life insurance policies cannot be included within an IRA account.
Bonds can be an ideal IRA investment choice because they provide steady streams of income while remaining relatively safe. To reduce taxes, invest in low-cost U.S. Treasury bonds; another way to diversify is with index-based funds with low fees such as Fidelity Total Market Index Fund (FSKAX) or Vanguard Total World Stock Index Fund (VTWAX). Such funds enable investors to create diverse portfolios without incurring time- and expense-consuming tasks like creating custom portfolios.
Rebalance your IRA portfolio regularly
Once your portfolio meets your investing goals, timeline and risk tolerance criteria, it is essential to periodically rebalance it so as to maintain its original asset allocation and reduce volatility and risk while improving diversification. Rebalancing can reduce volatility while improving diversification.
Tax-deferred accounts like an IRA or employer-sponsored retirement plan provide tax savings, so rebalancing is especially crucial. Depending on your unique situation, rebalancing may need to take place either manually using the available investment options within your retirement account, or investing in target-date funds which automatically rebalance as your retirement date approaches.
Rebalancing should occur at an optimal frequency based on transaction costs, tax considerations (such as short and long-term capital gains taxes) and your age. Too frequent checks–daily or weekly–can lead to overtrading and subpar investment returns, so it’s generally advised that rebalancing only occur quarterly, semiannual or annually if you hold a taxable brokerage account.
Monitor your IRA account regularly
Saving for retirement requires long-term effort, not overnight success. But with regular savings and investments that bring returns over time, a healthy nest egg should form by the time of retirement.
Individual Retirement Accounts (IRAs) come in various varieties: traditional IRAs, SEP IRAs for self-employed and small-business owners, SIMPLE IRAs and rollover IRAs. Each account type offers different contribution limits that adjust annually; furthermore, RMD restrictions impose further limitations when withdrawing your funds.
IRAs can be used to invest in stocks and securities; however, investing is risky and your IRA may lose money should stocks crash. To guard against this scenario, it’s wise to monitor your IRA account on an ongoing basis in order to identify issues quickly and take necessary actions, such as prioritizing payment of high-interest debt so your growth won’t be hindered by interest costs.