IRAs offer many investment opportunities for your retirement savings. However, it is crucial to carefully consider fees on an ongoing basis if deciding to roll assets from an employer plan into an IRA.
Investors should also carefully consider the role that mutual funds will play in their long-term strategy. Income funds could provide an ongoing source of income while capital appreciation funds may help realize gains more quickly.
Investment Objectives
Establishing clear investment objectives is vital in developing and executing an investing strategy tailored to your time horizon, risk preferences, and financial circumstances. A finance professional can assess your goals to identify suitable investing goals for you.
Diversifying your investments is vital to long-term success, and one way you can do this is by spreading out the savings in your IRA across stocks, bonds, and other assets with distinct geographical, industry sector, maturity or credit quality characteristics. Regular rebalancing to keep within the target asset allocation can further diversify your portfolio and add an extra layer of diversification.
Many IRAs provide more investment options than workplace plans like 401(k). For example, these accounts often allow investors to choose from a selection of mutual funds for building a diversified portfolio without needing the time or expertise of managing it themselves. Plus, professional money managers may add an extra level of support that helps your retirement savings along.
Investment Options
IRAs offer investors a diverse selection of investment opportunities, from stocks and mutual funds to index funds or exchange-traded funds (ETFs), index mutual funds and ETFs are often preferred due to their broad diversification capabilities and higher long-term performance potential. ETFs tend to be less costly than their mutual fund counterparts since they trade like stocks throughout the day and do not require hands-on management.
Investors who feel comfortable conducting their own research may opt to purchase individual stocks directly, although this strategy poses more risk and lower diversification compared to investing in an ETF or mutual fund that tracks a similar market segment.
Who Wants It Made Easy (TPIA) Funds may provide an easy and straightforward option, automatically shifting its asset allocation towards more conservative investments as the investor approaches retirement. Target-date funds are popular in employer-sponsored retirement plans but can come with higher fees than their IRA counterparts, potentially eating into returns over time; typically speaking IRA custodians don’t charge front or back-end sales loads like some target-date funds do.
Fees
Mutual funds are an investment tool that pool money from multiple investors and invest it in securities like stocks, bonds and cash market instruments. Unfortunately, mutual fund fees such as set-up, annual maintenance fees, custodial management fees and broker transaction costs can add up quickly to reduce returns significantly.
IRA accounts can be costly to administer, especially if you invest in higher-cost mutual funds. Although the percentage taken off your return may seem inconsequential at first, over time it can eat away at your portfolio’s value considerably.
Fees play an important part in how taxes treat an IRA. Although many miscellaneous itemized deductions are currently nondeductible, IRA distribution fees tend to be taxed. This is because investors often must purchase retail shares rather than lower-cost institutional ones when rolling over funds from their 401(k). This shift eats into retirement savings collectively by billions each year.
Taxes
As with any investment, an IRA has tax repercussions that you should understand before opening an account.
An IRA provides you with more freedom in terms of choosing where and how you invest, such as CDs, stocks, bonds and mutual funds compared with employer-sponsored 401(k).
If you withdraw funds before age 59 1/2, typically there will be a 10% penalty and ordinary income taxes due on any portion attributed to previously tax-deducted contributions and earnings. However, you may take penalty-free distributions for unreimbursed medical expenses, first home purchases and qualified higher education costs for yourself or family members.
Look for an IRA provider who charges low fees, such as account maintenance fees, custodial fees and transaction costs. Furthermore, consider finding one with no sales load – saving up to 1% on total investment!
