- For 2011, the most you can contribute to a traditional or Roth IRA is $5,000, or $6,000 if you are 50 or older. If you also have a 401(k) or 403(b) available, you need to decide how to allocate your money between the two plans. If you can max out both your 401(k) and your IRA, great, but if not, you need to decide which plan gives you the biggest advantage.
One strategy is to contribute enough to the 401(k) or 403(b) plan to get the full company match, then put the rest in your IRA. You can then invest any additional money back into the 401(k) or 403(b) plan. This can help you balance both plans, at least until you can afford to max out both plans. - One of the advantages of an IRA is that it gives you a wide range of investment choices. Unlike a 401(k) or 403(b), which provides only a handful of mutual fund selections, an IRA allows you to invest in anything you want, including individual stocks and mutual funds. Investors who want to maximize the tax-free benefits of a Roth IRA might choose individual stocks, since the earnings and capital gains on those stocks are not subject to taxation. The Roth IRA can also be an excellent vehicle for mutual funds that generate a lot of capital gains, since those capital gains are not taxed within the account.
- You can achieve significant tax savings with both a traditional and Roth IRA, but the way the tax savings work differs quite a bit. If you choose a traditional IRA, you can take an immediate tax deduction and save money during the current tax year. That makes a deductible IRA a good choice for workers who are in a high tax bracket and expect their income to go down when they retire.
With a Roth IRA, you do not get an immediate tax deduction, but if you follow the rules, you can enjoy tax-free withdrawals in retirement. That makes a Roth IRA a good choice for workers in low tax brackets, and for those who expect taxes to rise in the future. - No matter how you invest the money in your IRA, it is important to keep careful track of your performance. Retirement planning is not a set-and-forget-it proposition. You need to carefully review your performance on at least an annual basis, comparing the performance of your own IRA account with the performance you could have gotten had you invested in a stock or bond index fund. Tracking the performance of your IRA on a regular basis allows you to make any midstream corrections you need along the way, selling your losing investments and focusing on the best-performing ones.
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