I never get tired of talking about the great benefits of IRAs. With the options of current tax deductions and the potential for completely tax-free growth, IRAs are an excellent weapon in your retirement-savings arsenal.
But to make sure your IRAs are working as hard as they can, you have to do regular maintenance. Here are four things to look for to make sure your IRA is in tip-top shape.
1. Did you contribute?
Just as it's easy to procrastinate on getting your taxes done, you may have forgotten to make a contribution for 2006. Luckily, it's not too late -- you have until the April tax-filing deadline to make IRA contributions for the previous year. But bear in mind that many financial institutions have trouble getting new IRA accounts set up on the last day or two before the deadline, so waiting until the very last minute is generally not a good idea.
2. Are you correctly invested?
Investing doesn't lend itself to neglect particularly well. What may have been good investments when you first bought them may now be ill-suited for your financial situation. In addition, even if you have the right types of investments in your IRA portfolio, you may have too much of some and not enough of others. Doing an annual rebalancing of your IRA assets will keep your exposure to market risk in line with your overall plan.
Moreover, holding certain types of assets in tax-favored accounts like IRAs can help you reduce your taxes. For instance, stocks in a traditional IRA grow on a tax-deferred basis until you make withdrawals, but all of the growth will be subject to high tax rates on ordinary income. If you held those stocks in a taxable account, you'd have to pay tax on dividends along the way, but you might qualify for lower rates on dividend and capital-gains income. So some argue that the right place for stocks with high dividends, such as Washington Mutual (NYSE: WM ) and Pfizer (NYSE: PFE ) , is outside traditional IRAs. On the other hand, assets that generally don't qualify for those low rates, such as bond ETF iShares Lehman TIPS (NYSE: TIP ) , make a lot of sense for an IRA, because you're deferring tax that would otherwise accrue at high rates year after year.
3. Have you named the right beneficiaries?
Ideally, you'll spend all of your retirement savings when you retire. But if something happens to you before you're able to deplete your IRAs, you'll want to make sure your loved ones get the most from your account. Even if you generally have your estate planning in order with a will or trust in place, your IRA isn't covered by those documents. The only way you can choose who will receive your IRA after your death is by completing a beneficiary designation form from your financial institution.
Taking a look at these beneficiary designations from time to time is smart. While you won't want to change them very often, it's easy to overlook them during big transitions in your life. For instance, you may not want your ex-spouse getting all of your IRA money after you die.
4. Have you rolled everything over?
With the frequent job changes that most workers face these days, it's common for people to have multiple 401(k) accounts and other employer-sponsored retirement plans from previous employers. While there may be some advantages to keeping those accounts open, you can simplify your life by rolling them over into an IRA. With all of the hidden fees that some 401(k)s charge, doing an IRA rollover can save you a bundle.
These four simple steps will give you the confidence that your retirement accounts are working their hardest for you. But managing your IRAs is just the tip of the iceberg when it comes to planning for retirement. That's where the Fool's Rule Your Retirement newsletter comes in, with big-picture help on how to make the most of your retirement savings and what to do once you've reached your retirement goals. This month's issue includes the latest on setting targets for retirement funds, saving on health care costs, and other great tips. You can read the April issue along with everything else Rule Your Retirement has to offer free with a 30-day trial.
Be sure to look through the Fool's IRA Center for all sorts of information about IRAs, including how to open an account, compare your various options, and find the IRA that's best suited to your retirement needs.