This article article was published in the "New Rochelle Review" in the May 2006 issue.

“Life And Money”  TM –  IRA Check-Up - Part 1

By Frank Sisco

At least once a year, you should do a 4-step check-up of your Individual Retirement Accounts (IRAs), including (1) how much you are putting into IRAs and whether a Roth IRA makes more sense (2) how the money is invested (3) who are set up as beneficiaries and (4) whether there are alternative strategies in your changing circumstances. Do it now while taxes are fresh in your mind and your records are handy.  Get the guidance of an experienced financial advisor like a CPA or financial planning specialist if appropriate.  This month's column discusses the first two steps of the check-up.

(1) Evaluate how you make contributions and consider Roth IRAs - The annual contribution amounts are $4,000 for 2005 and 2006, or if age 50 or older the amounts are $4,500 for 2005 and $5,000 for 2006.  However, for a Traditional IRA, if you are an active participant in a retirement plan such as a 401(k) plan at work, then you cannot contribute the full IRA annual amount if your adjusted gross income exceeds $70,000 if you are married filing jointly and $50,000 if single. For a Roth IRA, the income limit is $150,000 if you are married filing jointly and $95,000 if single.

Generally, Roth IRAs are better than Traditional IRAs for several reasons.  First, for a contribution to a Roth IRA, all of it is saved and not taxed whereas for a Traditional IRA the money saved from the deduction is often spent or if reinvested does not earn as much as the Roth IRA would tax-free.  Secondly, you are not required to make minimum distributions from Roth IRAs starting at age 70 ½ years old like Traditional IRAs, enabling you to grow the funds further and to pass along more wealth.  Thirdly, for Roth IRAs you can keep on contributing past 70 ½ years old if you still generate earned income. Because of these advantages, consider putting new money into Roth IRAs.  Get guidance on whether to convert old money from Traditional IRAs to Roth IRAs, which triggers a tax.  Perhaps, do so in a period of depressed income brought about by a business loss, or do so periodically over time.

(2) Review the investment results and strategies.   Analyze performance.  Make a schedule of all your IRAs, with columns for the starting investment amount and date and the value at the end of each year up to the current year.  Compute the approximate investment returns, annually and cumulativelly.  Evaluate performance, risk and mix.

For most people who are not very wealthy, IRA investments should be primarily in fixed-rate investments with reliable value and not in equities or mutual funds.  Because of low 15% Federal capital gain rates, the portion of your total investments that you decide to invest into equity-related investments (in order to have the potential of greater appreciation) should be outside of your IRAs not inside of IRAs as IRA withdrawals are subject to higher ordinary income tax rates.  One conservative reliable strategy is setting up a laddered portfolio of FDIC-insured Certificates of Deposit of varying maturities from one year to five years.  Such a program also removes the volatility of values that frequently leads to investors not holding out for the expected higher returns of equities but rather selling early when returns are depressed.  Consider combining your accounts into one free or inexpensive brokerage account in order to simplify matters.

Next month's column will include a discussion of the other two steps.

About the author

Frank Sisco is a CPA and Personal Financial Specialist, and author of many articles about personal finance and issues of life and money.   His firm, Financial Management Corporation, is located in Harrison, NY.  Frank makes his home with his wife and daughter in New Rochelle, NY.  He can be reached at 914.381.3737 or by email at ideasmoney@aol.com.  Visit his website at www.LifeAndMoney.com, which contains this and prior articles.