Thursday, November 29, 2001

Painful as it might be to look at your mutual fund statements right now, a difficult market is no excuse for neglecting your IRA.
The funds in your individual retirement account deserve the same scrutiny as your entire portfolio. That’s because the IRA’s unique structure can allow investors to maximize their fund profits while minimizing their tax bills.
“A lot of people will buy a fund for an IRA and forget about it. That’s a mistake,” said Bernard Kiely, a certified financial planner in Morristown, N.J. “Funds change … and your entire portfolio may need to be adjusted depending on market conditions.”
First, evaluate your IRA funds in the context of any broader holdings, such as brokerage accounts and 401(k). All investors should have an asset-allocation plan that spreads money over stocks, bonds and other investments according to goals, risk tolerance and age.
Check how well your overall portfolio assets, including your IRA funds, conform to that allocation. For example, are 50 percent of your holdings in stock funds, as your strategy calls for? Or has the weak market increased the value of your bonds, so now your equity holdings are down to 40 percent?
Next, make sure those funds are performing up to the average for their fund class.
“The decision then comes down to, which investments do we acquire in a taxable account and which would be better in a tax-deferred or nontaxable account like an IRA?” said F. Dennis De Stefano, a certified financial planner in Maui, Hawaii.
There are two types of IRAs. In a Roth IRA, investors pay taxes on money deposited into the account and then watch it grow tax-free. Many financial planners say Roth IRAs are particularly suited to actively managed funds, which tend to have higher capital gains.
Since investors are taxed on capital gains, it makes sense to use a Roth IRA which grows tax-free to minimize taxes.
In contrast, contributions to a regular IRA are considered tax deductible, although investors pay taxes upon withdrawal.
Regular IRAs can help trim more immediate tax bills, because of the tax deduction investors get when they make a contribution. It’s also possible that when they withdraw the money in retirement, their income, and therefore the taxes they pay on those savings, will be lower.

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