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It’s that time of year when, if you’re like most people, you begin to once again turn your attention to your IRA. The year-end statements are starting to trickle in, so you might feel the urge to re-evaluate things and perhaps make some changes.
But, do you really know what you should be looking at? And do you have a clear understanding of what your real options are?
Like any article of this nature, you should view it only as a starting point. You’ll need to speak with your financial advisor to understand what your specific circumstances reveal. The following five issues, however, offer you an excellent conversation starter when it comes to determining what to do with your IRA right now.
Contribution Limits
Are you saving enough? If your IRA represents your only savings option, that might not be the case.
“The biggest issue for IRA holders is that they have contribution limits,” says Chris Abrams of Abrams Insurance Solutions in San Diego. “The limit for individuals contributing to IRAs in 2021 is $6,000 (or $7,000 if you’re over 50). This presents a barrier for those looking to get aggressive about funding their retirement. I recommend pooling an IRA with other investment vehicles to make sure you’re saving enough for retirement.”
Now, you might think a 401(k) plan represents your only option. Depending on your business and employment situation, you may have other, more attractive alternatives.
There are plenty to choose from, so it’s best if you ask your advisor to present to you those that are most viable given your personal state of affairs.
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Too Many IRAs
If you’ve been around for a while, maybe changed jobs on a regular basis, or even switched financial companies over the years, chances are you don’t have just one IRA, you have quite a few scattered over the brokerage landscape. This may or may not be a problem, but it definitely represents a challenge.
“You have several IRAs and you aren’t sure if you can combine them, or you believe you have to keep them all separate. Depending on the type of IRA, this can be true,” says Karen Burhoe, Founder of Making Cents Count in Camarillo, California.
Burhoe says, “The way to resolve this is to carve out a specific day and time, and to hold yourself accountable in knowing about the types of investments you hold. If you need to reach out for assistance, ask someone with whom you respect, or get a referral, and get the answers you need. It can be confusing and overwhelming, but if it’s truly important, it’ll become a priority. You control your finances; they don’t control you.”
Higher Taxes Coming
No one wants to hear this, but this is a pendulum that is constantly swinging back and forth depending on the flavor of the day that happens to control the levers in Washington D.C. And right now, that flavor appears to be favoring higher taxes, especially for those in the upper brackets. And if you’ve been saving in an IRA your entire career, chances are, if you haven’t reached them yet, you are about to enter those higher tax tiers. (Talk about perfect timing!)
“A big issue for current IRA holders is the potential legislative changes,” says Brandon Steele, Founder/President of Mainsail Financial Group in Bellevue, Washington. “We have seen a massive shift in 2020 with the SECURE Act’s passing and how this impacts the estate planning intentions for those with IRAs. We may see higher taxes and more legislation to come that limits those with pre-tax IRA accounts ability to course correct.”
You likely won’t have many options after the fact, so now is the time to be proactive. “One area to explore is looking into Roth IRAs as a way to create more flexibility,” says Steele.
Bear Market Anxiety
When it comes to “perfect timing,” there is nothing more imperfect than what’s called the “sequence of return” risk. This pertains to having the bad luck of retiring just as the market enters a bear market.
Now, no one can time the market, but you should be aware of what’s going on.
Jamey McClenny, Investment Advisor Representative for BCJ Financial Group in Tallahassee, Florida, believes the biggest issue facing current IRA holders “is fixed interest rates are at historic lows while equity valuations that are at extremes. Historically, these situations have not ended well for investors.”
What should you do to avoid sequence of return risk? “It is critical that IRA owners understand what they own,” says McClenny. “Bear markets are an integral part of all market cycles. IRA owners need to find out how their portfolio’s holdings performed in 2008. That is much more important than how it performed in 2009 or 2020 when markets were coming off of a deep trough.”
Short of that, if you’re retiring soon, it might make sense to start creating a cash cushion to protect you in the event of a steep and sudden market decline.
Too Many Investment Choices
If the above aren’t bad enough, there’s this problem. Every market scenario you can imagine offers you a plethora of investment options to pick from. How do you know which investment option is best for you? Answering this key question leads to a problem many retirement savers have.
“It mostly boils down to too many choices,” says Syed Nishat, Partner at Wall Street Alliance Group in New York City. “While diversifying is a sound strategy, and being able to invest in many sectors mitigates risk while allowing for growth, it is often a Sisyphean task for a normal investor to try to choose from the ever-growing list of investment options. Without the time and understanding to be able to fully look into what’s available, retirement savers will often default to the investments they already know, even if that’s not really the best choice for their situation.”
While critical to addressing this concern, the answer to it goes far beyond merely working with a professional. It’s what you do with that financial pro that will make a difference between living a life of constant worry or a life of ease.
“To make sure you’re choosing the investments that will work for you,” says Nishat, “you should work with a financial advisor to determine what your goals are first and foremost. Identifying goals and having an understanding of your circumstances will allow an advisor to make strong recommendations that will actually work for you, exposing you to the broader range of available options without you having to do the legwork.”
Undertaking your yearly evaluation of your IRA (or IRAs) shouldn’t be a burden. (And it won’t be if you have help.) What it must do, however, is ask the right questions and seek the solutions to your specific issues, not the issues you happen to read in a financial article.