There are some IRA moves that are obviously smart. For example, contributing as much as possible, properly allocating your assets, and knowing when you can withdraw your money without a penalty are good practices.
On the other hand, there are some IRA moves that aren’t discussed as much. For example, the best type of IRA for you might be different at different points in your life. Furthermore, spousal IRAs can help you double your savings rate, and rolling your old 401(k) into your IRA can potentially save you lots of money in investment fees.
Regularly check whether a traditional or Roth IRA is best for you
The “traditional or Roth” question is one of the most common types of articles written about IRA investing. I’ve written a few of them myself.
However, one thing that isn’t mentioned often is that the same type of IRA might not be appropriate for your entire life. It’s worth reevaluating the two choices every few years to see which is best.
Specifically, the most important question you need to ask yourself is, “when will my income tax rate be higher — now or after I retire?” Obviously, there’s no way to answer this question with 100% accuracy, as there’s no way of knowing how tax brackets could change or how much you’ll be making by the time you retire.
However, the point is that a Roth IRA is better suited to savers who pay little or no federal income tax now. I often say that a good rule of thumb is those in the 10% or 12% tax brackets for 2018 are almost always making a smart choice with a Roth IRA. In the higher tax brackets, it can make more sense to take the immediate tax benefit of a traditional IRA.
As a personal example, when I was fresh out of school and earning a relatively low salary as a first-year high school teacher, I contributed to a Roth IRA. A few years later, I found myself in the 25% tax bracket and it made more sense to me to take the more immediate deduction.
The point is that you don’t just need to open one IRA and continue to fund it year-after-year. Every so often, take a few minutes and make sure that the IRA you contribute to still makes sense for your current situation.
Contribute to an IRA for your spouse
One of the basic requirements for contributing to an IRA is that you need to have earned income of at least your contribution amount. In other words, the IRA contribution limit is currently $5,500 per year for most people, but if your only earned income was $3,000 from a part-time job, that’s the most you can contribute.
However, an exception exists for spouses. While there’s no such thing as a joint IRA (the “I” stands for individual), spouses can contribute on each other’s behalf, even if one spouse doesn’t earn any income.
Consider this example. You’re 35 and earn $80,000 in 2018, and contribute $5,500 to a Roth IRA to save for retirement. Your spouse is a stay-at-home parent, and therefore doesn’t have any income. You are allowed to contribute up to $5,500 to an IRA in their name as a “spousal IRA.”
For couples where only one spouse works, this can double the rate at which you accumulate your nest egg. Finally, in order to do this, the higher-earning spouse needs to have enough earned income to justify both contributions.
Roll your old 401(k) into your IRA
If you have a 401(k) or similar retirement plan with a former employer, you have a few options. You can cash the account out, which is almost never a smart idea. You can roll the account into your current employer’s plan, or can leave it alone in your old employer’s plan, provided that it meets their minimum balance requirement.
Alternatively, you can roll it into an IRA — either one that you already have, or a newly opened IRA.
There are several reasons to consider this option. Perhaps most important is that IRAs give you significantly more control over your retirement investments. Generally, 401(k)s offer a selection of investment funds to choose from — maybe a dozen or two. On the other hand, with an IRA, you’re free to invest in virtually any stock, bond, or mutual fund that you want. If you’ve wanted to put some of your 401(k) savings in say, Apple stock, rolling your account into an IRA can allow you to do just that.
Of course, investing in individual stocks isn’t for everyone. If you’d rather keep your retirement on auto-pilot with mutual funds, an IRA could still help. With literally thousands of mutual funds and ETFs to choose from, it’s likely that you can find some similar funds with lower fees (known as “expense ratios” in mutual fund terminology) to invest in.
Finally, it’s also important to realize that IRAs have different flexibilities when it comes to withdrawing funds before reaching 59 ½ years old. While there’s no such thing as a loan from an IRA, you have the option to withdraw up to $10,000 penalty-free for a first-time home purchase, or any amount to pay for college. Neither option is available in a 401(k).
The views of the author of this article do not necessarily represent the views of Gradifi. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. Readers should consult their own attorneys or other tax or financial advisors to understand the tax, financial and legal consequences of any strategies mentioned in this article.