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With April 15 just around the corner, you'll want to pull out all the stops to find ways to cut your tax bill. With that in mind, we asked three of our Foolish contributors to weigh in on some common questions about investing in IRAs.

Why do you like IRAs?
Robert Brokamp, lead analyst, Motley Fool Rule Your Retirement: Besides the tax advantages, they're a great way to segregate money for long-term purposes. We all try to restrain our spending, but we've all also occasionally spent more than we should have, partially because the money was sitting there, waiting around in our checking accounts. If you move some of that money to an IRA, you've put it in "Time Out" -- for decades. You have to make an effort to spend it -- something most of us wouldn't even think of, except during emergencies.

John Rosevear, Fool contributor: I like IRAs because:

  • I can invest in almost anything I might want, in a tax-favored way.
  • Low-fee options are widely available.
  • Human-nature-transcending features such as auto-deduct/automatic contribution programs are widely available.

Dan Caplinger, Fool contributor: IRAs are a great way to track your progress toward retirement. While you might see balances in other accounts rise and fall with spending and saving patterns, it's easy to max out an IRA and watch it reflect your saving and investing habits over the years.

What do you like better: traditional or Roth IRAs?
Brokamp: You can't help but like Roth IRAs, where you get tax-free growth after paying taxes on the contributions at rates we likely won't see again for decades. As the saying goes, you pay taxes on the seed, but reap the harvest tax-free.

There's also the neat little trick of being able to withdraw the contributions (but not earnings) tax- and penalty-free, if you need it. Of course, this shouldn't be done lightly. But if you need the money for a home, college, or a garden-variety emergency, it's available with no short-term consequences. (Long-term, of course, you'll have less money in retirement.)

Rosevear: I like both traditionals and Roths, in different ways. The traditional gives you the tax deduction, which can be helpful for some. A Roth's principal-withdrawal feature, on the other hand, makes it easier to overcome the "well, I might NEED this money" objection. Both give you shelter from the tax consequences of investments with income streams.

Caplinger: I like the Roth, because in essence, it lets you put more money away. Sure, if you put the same amount of money in a Roth or a traditional IRA and invest them the same way, you'll end up with the same balance when you retire. But because you won't have to pay taxes on the Roth, that money's worth more to you in retirement.

What are some good investment ideas for IRAs right now, and why do they belong specifically in an IRA?
Brokamp: Use your IRA for investments that pay higher-than-average dividends or investment strategies that result in a lot of short-term gains. That includes stocks like Altria (NYSE: MO  ) and Southern Company (NYSE: SO  ) . If you invest in bonds yet aren't in retirement, use the funds in your IRA to avoid paying ordinary income taxes on the interest. Finally, IRAs are also good for Treasury inflation protected securities (TIPS), which not only pay federally taxable interest each year, but the inflation adjustment (known as phantom income) is also taxable each year.

Rosevear: Those who've read my articles lately already know what I'm going to say here: IRAs are a great place for fat dividend stocks! Cash dividends are taxable, even if reinvested. The way to maximize a dividend-investing strategy is to avoid those taxes. Three stocks I own in an IRA include Teppco Partners (NYSE: TPP  ) , France Telecom (NYSE: FTE  ) , and BP (NYSE: BP  ) -- all of them have dividend yields of 8% or more.

Roths, of course, are an excellent place to put hot growth stocks, as you'll never ever have to pay taxes on the gains.

Caplinger: I especially like putting investments in IRAs that don't qualify for lower tax rates on dividends. That includes REITs like Vornado Realty (NYSE: VNO  ) and energy royalty trusts like San Juan Basin (NYSE: SJT  ) . In addition, bonds and other fixed-income plays also do well in IRAs.

How should your IRA fit into your overall asset allocation?
Brokamp: While saving for retirement, use your IRA for investments that would otherwise generate taxable ordinary income, dividends, or capital gains each and every year. This changes a bit in retirement. Then, keep dividend-paying investments out of IRAs since qualified dividends are taxed at lower rates than ordinary income. Use your IRA for investments that produce income or gains that you reinvest and plan to hold on to for many years.

Rosevear: An IRA's tax advantages are great for dividend stocks, interest streams from taxable bonds, etc., and Roths are especially great for big-growth holdings as noted. But in many cases, deciding what to hold in an IRA should come after you see what the best options are in your workplace savings plan. In other words, decide on an allocation, see how best to fit whatever's available in your 401(k) into it, and then use your IRA to fill out the rest.

Caplinger: I like to use my IRA to help rebalance my portfolio, because that way I don't have to pay taxes on the rebalancing trades. So I'll keep a mix of stocks, bonds, and cash in my IRA -- and while it won't necessarily match my overall asset allocation, it has enough of all three types of investments that I can rebalance when I need to.

Want to learn more about IRAs? We've got some great resources:

Frustrated with your 401(k)? Even if your employer's plan isn't the greatest, you don't have to give up your dreams of a happy retirement. Get the tips you need to turn your retirement savings around in our special report, "How to Make The Most of Your 401(k)" -- just click here for instant free access.

You might think that Fool contributors Robert Brokamp, John Rosevear, and Dan Caplinger hate their jobs, because they never stop talking about retirement. But you'd be wrong. John owns shares of Teppco Partners, France Telecom, and BP. Dan owns shares of Altria. FranceTelecom, Southern Company, and Teppco Partners are Motley Fool Income Investor selections. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy won't quit on you.


Read/Post Comments (5) | Recommend This Article (42)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 03, 2009, at 2:35 PM, FinancialFellow wrote:

    Amen on the IRA's. They are one nice little tax advantage I hope the government only continues support and expand. Two rules that I follow within my IRA are 1) The money is soley for retirement and 2) Stay away from individual stocks - stick with low expense index funds.

    Bottom line, though, save early and often and tax full advantage of the tax benefits offered by IRA's (and 401k's). Getting back to the individual stock game, though. I like DFS (Discover Financial Services). They haven't been hurt as badly as some of the other publicly traded financial institutions. But, they are cheap compared to their levels before the recession. They offer some of the better promos out there to new accounts. Recently they extended their $50 promo: http://financialfellow.com/2009/04/02/discover-card-extends-...

  • Report this Comment On April 03, 2009, at 3:18 PM, skyraider33 wrote:

    your putting TPP in an IRA? What about unrelated business income?

  • Report this Comment On April 04, 2009, at 7:13 AM, maven12 wrote:

    Skyraider33, could you expand on that notion of unrelated business income (UBI)?

    I have been trying to imagine how anything which is a legal enterprise could have UBI inside an IRA. Unlike a charity -- 501(c)(3) -- an IRA doesn't have to pay taxes, so UBI seems unlikely; but maybe there's something I am missing.

  • Report this Comment On April 04, 2009, at 5:49 PM, JamesAven wrote:

    Thanks for the excellent tips on using IRA's to defer taxes. I agree with FinancialFellow that we need to stick to index funds when investing our IRA's. I have forwarded this link to all http://DesktopBudget.com customers. Keep it coming :)

  • Report this Comment On April 05, 2009, at 11:47 AM, artswenson wrote:

    You should know that if you hold Limited Partnerships in an IRA, you will be subject to income tax if you receive more than $1,000.00 in something called "Unrelated Business Income" This can include a sizable portion of your payments from the partnership.

    Foreign stocks held ion an IRA ARE NOT exempt from the taxes levied by the foreign government. Furthermore, any foreign tax paid by your IRA is NOT eligible for deduction on your Federal income-tax return

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