As Social Security benefits and Medicare face cuts, you know you will be mostly responsible for a comfortable retirement. No matter if you're a couple years or a number of decades from retiring, the reality is that you will foot a substantial part of your retirement cost of living. That's why choosing the proper investment options in IRA rollovers is so vital.
The fist issue to understand is the income tax issue. Since the items in IRA rollovers are sheltered from tax, you want to make best use of that feature. Some investments are better held inside IRA rollovers while other investments are best held outside of IRA rollovers. For example, it is not the best idea to hold stocks inside an IRA rollover. When you buy a stock you pay no tax until you sell it. Therefore, stocks are inherently tax-deferred investments. Even if the stock pays dividends, those dividends are taxed at a preferential rate of 15%. Therefore, it would waste the tax-sheltered aspect of IRA rollovers to hold individual stocks inside of them. Better investments for IRA rollovers from a tax standpoint would be bonds and bond funds, which are subject to ordinary income rates when held outside of an IRA , and growth mutual funds, which tend to generate large amounts of ordinary income. Since ordinary income rates go as high as 35%, having these types of investments inside IRA rollovers makes quite a bit of sense.
There is another tax issue and that is whether your IRA rollover should be a traditional IRA or Roth IRA. In most cases, it is a smart move to opt for the Roth IRA rollover. By converting your retirement plan resources to a Roth IRA rollover, you'll have the opportunity to withdraw the proceeds tax-free after you retire. This really is an intelligent idea in case you anticipate that we will have higher tax rates in the US in the future. Of course, the cost of converting to a Roth IRA rollover is that you must pay the tax today on the amount of money rolled over.
Beyond the tax issue, are other factors on how to invest the money in IRA rollovers. One issue that impacts the investment choices is your time horizon. A 40-year-old would understandably choose different retirement investments than a 62-year-old. A 40-year-old should opt for a higher allocation of growth investments such as stocks and growth mutual funds a 62-year-old would opt for a less volatile portfolio may be having 50% of the funds in growth investments and 50% in fixed income investments such as bonds or bond funds. This more conservative allocation would lower the volatility and when taken into retirement and would be more reliable to produce consistent income.
Additional considerations for investments that go into IRA rollovers would include:
- Investment expense ratios. if you purchase individual stocks and bonds, you do not have ongoing expenses. But if you purchase any type of mutual fund or ETF in IRA rollovers, there are on going expenses. In particular, look towards the text 'no load' when evaluating IRA rollover accounts expense choices.
- Morningstar scores. Make choices that have good ratings
- Investment track record. Despite the fact that historical performance isn't a guarantee of how the financial selection will perform later, taking a look at past overall performance ought to give you a general concept of how you can expect a selection to perform in up and down economies
These few simple considerations when working with IRA rollovers can make a significant difference in the size of your nest egg.