With New Year's finally behind us, it's time to look forward and take steps to improve your investing and your financial life. Yet unparalleled uncertainty still exists, making 2013 an unusual year and thereby changing what has often prevailed as conventional wisdom.
That's why this year, you'll see different advice in this column than you've gotten in recent years. In 2009, 2010, 2011, and 2012, opening and funding an IRA to save for your retirement earned top-priority status. But with so much about tax planning issues up in the air right now, you need a more flexible strategy that can adapt to the ever-changing legislative environment.
Why IRAs are still smart
To be clear, I'm not saying that IRAs are a bad way to invest even under whatever tax laws end up prevailing in 2013. Unless unexpected fundamental changes in the way retirement accounts get taxed somehow become law, IRA investors will still get the benefit of tax deferral for as long as they keep their assets in their retirement accounts, and those who choose Roth IRAs will benefit from tax-free withdrawals in retirement.
In fact, with tax rates on dividends and capital gains on the rise at least for upper-income taxpayers, the value of keeping assets in an IRA will increase in 2013. Taxpayers won't have to face a near-tripling of taxes on dividends this year, but with the compromise position raising the maximum rate from 15% to 20% on upper-income taxpayers, IRA owners in those brackets will appreciate the lack of taxation on their retirement-account dividends even more.
Why waiting makes sense this year
I'm a big fan of getting money into retirement accounts as early as possible. But this year, the unprecedented level of uncertainty about taxes makes it extremely difficult to do a precise analysis of what type of IRA you should use. Even with a fiscal cliff deal done, you can't be absolutely certain that even basic issues like current-year tax rates are truly off the table, let alone more complex considerations like the various deductions and credits available to taxpayers.
Elsewhere in the retirement realm, one thing remains true: If your employer offers a 401(k) plan that includes a matching contribution, don't wait; get in touch with your HR representative and start putting enough money into your 401(k) account to get the full match. Turning down free money doesn't make sense with most 401(k)s, and with the majority of employers offering only traditional 401(k)s rather than Roth 401(k)s, your limited options make the decision an easy one.
Why you should still do an IRA this year
So if 401(k) plans are a surer bet this year, why bother with IRAs at all? After all, 401(k)s let you save a huge amount toward retirement -- $17,500 for those under age 50 this year, and $23,000 for those 50 or older -- and make the lower limits of $5,500 and $6,500 respectively for IRAs look puny by comparison.
But the major difference with IRAs is that you can pick and choose just about any investment you want. Consider some options:
- Few 401(k) plans give their participants a chance to invest in individual stocks. So if you like picking top stocks rather than tracking indexes, you might not get the opportunity in a 401(k) account. With an IRA, though, the choice is yours.
- With most 401(k) plans, if you want to invest in gold or other precious metals, you're out of luck. But with access to ETFs SPDR Gold (GLD 4.12%) and iShares Silver (SLV 4.40%) as well as a host of specific mining companies, an IRA brokerage account will let you pick and choose your exact exposure. You can even find specialty IRA providers that let you own certain types of bullion coins in an IRA if you want.
- Even if you like funds, your 401(k) plan might not give you access to the best low-cost funds. Paying big sales loads for captive retirement assets is unconscionable, but some 401(k) plans nevertheless stick you with those undesirable investment options even for basic asset-allocation strategies. With an IRA, you're never trapped, as you can always fall back on low-cost ETFs Vanguard Total Stock ETF (VTI 0.18%) and iShares Core Total US Bond (AGG +0.11%) as ways to put together a simple split between bonds and stocks.
So start setting your IRA money aside, but consider waiting until you have maximum clarity about taxes before you make a final decision about what type of IRA to use. That way, you'll avoid the complications of trying to recharacterize a contribution after the fact and keep things as simple as possible while still getting the full tax benefits that IRAs offer.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.
