Whether you think about it just once a year or follow it every day, your IRA gives you several investing advantages you won't find in your other accounts. So before you treat your IRA like just any of your other investment accounts, make sure you understand why your IRA is truly special.
You may not think of your IRA as a particularly important portion of your portfolio. After all, given its primary purpose of helping you enjoy happier retirement down the road, your more immediate financial needs may demand more of your attention -- and you may look more to your traditional brokerage and mutual fund accounts to help you meet them.
But from an investing standpoint, your IRA gives you unique chances to make better investment decisions. Here are some reasons why:
1. Taxes? Forget about it
At its core, successful investing involves finding the most promising companies and sticking with them for the long term as they realize their full potential. Ideally, you'd like to identify those companies early on, enjoy big stock gains as they hit their full stride, and then sell if insurmountable obstacles appear on the horizon.
But in a regular brokerage account, a number of other factors distract you from this pure approach to investing. Most notably, taxes on capital gains often deter investors from selling a big winner, even when times get tough for the company. That can prove disastrous, as you watch your gains evaporate just because you didn't want to pay taxes on them.
Look, for instance, at the gains some stocks enjoyed over the past several years -- and the losses investors who held on for tax reasons suffered:
|
Stock |
Total Return, 2003-08 |
Loss, 2008-09 |
|---|---|---|
|
Monsanto |
1,254% |
(32.1%) |
|
Caterpillar |
307% |
(32.8%) |
|
Amazon.com |
380% |
(31.5%) |
|
Best Buy |
252% |
(35.5%) |
|
Humana |
819% |
(56.2%) |
|
Aetna |
543% |
(49.9%) |
|
US Steel |
759% |
(65.0%) |
Source: Yahoo! Finance. Figures as of Jan. 10, 2003; Jan. 11, 2008; and Jan. 9, 2009.
The tax deferral that an IRA offers, however, eliminates that tax impact away from your investing decision-making. As a result, you can focus entirely on the business. If you quickly earn a big gain that you don't think is sustainable, you can sell without worrying about whether you have a short-term gain that'll be taxed at a higher rate. If you've seen a stock you own soar over the years, but you think it's due to run out of gas, you can sell without paying a big tax bill.
2. Creditor protection
When the economy was booming, few people thought about the protection that IRAs provide against creditors. But now, anything that can protect against debt collectors has gotten new attention.
Employer-sponsored retirement plans like 401(k)s have traditionally had strong protection from creditors, but many states didn't offer the same protection on IRAs. That changed in 2005, when federal law added IRAs to the list of protected assets in bankruptcy, up to $1 million.
Although the bankruptcy laws don't apply to all debts, they provide a useful weapon against creditors -- as well as a further incentive to contribute to IRAs, and keep the money there even during hard times.
3. Financial aid
More and more, colleges and universities try to tap into family assets to reduce financial aid packages to students. In determining how much students and their parents should contribute toward education, schools look at a wide variety of assets.
IRAs, however, are among assets not counted as resources for financial-aid purposes. That can make a huge difference, whether you're looking at a brand-new IRA for the student or at his or her parents' larger accounts.
4. It's where the money is
As time goes by, your IRA will likely become your biggest asset. Year in and year out, those annual contributions add up over time. When you leave various jobs, rolling over 401(k) accounts into IRAs typically saves you in fees and administrative hassles. As a result, over a 40-year career, many find their IRAs grow beyond their expectations.
With this much at stake, you can't afford to treat your IRA like just another account. Instead, use the advantages that your IRA gives you to make the most of the opportunity to invest with a pure profit-driven strategy. Doing so will boost your overall results, and ensure that your retirement years will be happy ones.
More on making sure you retire well:
- One resolution you can't afford to break.
- How to supercharge your income with stocks.
- Make sure you'll never run out of money.
