The individual retirement account is alive and well, even though its loyal investors have seen their balances shrink in value during the stock market decline.
In fact, the federal government has made it possible to contribute even more to an IRA starting with the 2002 tax year.
The spotlight remains on the company 401(k) retirement plan due to the woes of employees of Enron Corp. and other firms who had too much of their money in their employer’s stock.
The IRA, on the other hand, has always been a “do your own thing” kind of a vehicle, unfettered by the limited choices of any one firm’s plan.
“Our clients who have supplemented their retirement through IRAs are a lot less concerned these days than the ones who relied completely on their 401(k) plans,” said James Fritz Schafer, a certified financial planner with Brooke & Co. in Cincinnati, a city where many Procter & Gamble retirees had to cope with the volatility of that firm’s stock over the past two years. “That’s because the IRAs are less likely to be so concentrated in one company’s stock.”
More than 44 million U.S. households, or 42 percent of all families, currently have IRAs. The median size for a family is $30,000, usually held in two different accounts, according to the Investment Company Institute.
“IRA money should always be invested early in the year so you have more tax-deferred earlier, since that pays off in the long run,” advised Ed Slott, CPA and editor of “Ed Slott’s IRA Advisor” (www.irahelp.com) in Rockville Centre, N.Y. “If you’re concerned about the current market, still make the commitment by putting that money into a money-market account and then gradually moving money out of it into stocks each month to ride out the volatility.”
For the 2002 tax year, you can contribute $3,000 to a traditional or Roth IRA, compared to the $2,000 allowed for 2001. This annual limit rises to $5,000 by 2008. If you’re over 50, you can put in another $500 as a “catch-up” provision beginning with the 2002 tax year.
“I think raising the limit on IRAs is a great opportunity, since very few people have 401(k) plans that are perfect in all aspects,” said Peter Di Teresa, senior analyst with Morningstar in Chicago. “Just make sure your IRA portfolio really has a core, which in the case of stocks would be a stock index fund or a large-capitalization stock fund that allows you to participate in the long-term strength of the market.”
Regardless of your income, you can deduct the full maximum contribution to a traditional IRA if you and your spouse aren’t active participants in an employer-sponsored retirement plan. You may still be able to deduct it even if you’re in an employee plan, though deductibility phases out as your income rises above certain levels. (Contributions to the Roth IRA are not deductible andits qualified distributions aren’t taxable.)
To further encourage low- and middle-income taxpayers to save for retirement, a temporary non-refundable tax credit has been created for contributions made by eligible taxpayers to a qualified plan for tax years 2002 through 2006. The maximum available is $1,000 for a $2,000 contribution.
“Because an IRA itself is not an investment, but rather a government structure through which you can invest, it can be anything you want it to be,” explained Sheldon Jacobs, editor of “The No-Load Fund Investor” (www.sheldonjacobs.com). “While you should always put as much money as possible into an IRA, the fact that you also have money in taxable accounts means you must select an overall asset mix that’s suitable for you.”
For a client 25 to 40 years of age, Schafer typically suggests 80 percent of IRA assets be put in equities and 20 percent in bonds and cash. For those 40 to 65 years old, the equity portion would be reduced to 60 percent, and for those over age 65 the equities should drop to 40 percent of the total.
Schafer’s favorite funds for IRAs include American Funds Washington Mutual (AWSHX), Investment Company of America (AIVSX), Putnam Fund for Growth & Income (PGRWX) and Putnam Global Equity (PDETX).
For core IRA holdings, Di Teresa recommends the funds Vanguard 500 Index (VFINX), Vanguard Growth & Income (VQNPX) and Dodge & Cox Stock (DODGX). Meanwhile, TIAA-CREF Growth & Income (TIGIX) “straddles the fence” between indexing and active management, he says.
In fixed income, Jacobs prefers inflation-adjusted bond funds such as Vanguard Inflation-Protected Securities (VIPSX), PIMCO Real Return Bond (PRRDX) and American Century Inflation-Adjusted Bond (ACITX). He also likes the value stock funds Berger Mid Cap Value (BEMVX) and Meridian Value (MVALX).
