Contributing to your IRA for 2008/2009
Some of my clients have baulked at the idea of making a contribution to their traditional or Roth IRA accounts for 2008 before the April 15th deadline. The idea of pumping more money into stock and bond investments in the midst of this ‘economic storm’ is an eerie proposition for some. I’d like to remind anybody still pondering their IRA decisions for 2008 about a few things:
First, we make IRA contributions primarily for the tax benefits. If you’re convinced that the market may still shed some value in the near future, you can always put your contribution into cash or a money market and move it into different asset classes when you feel ready to do so. If you’re within the income limits, making a deductible contribution of $5,000 or $6,000 can greatly cut your tax bill for the year. It could also possibly lower your income enough to qualify you for student loan deductions, a stimulus check, etc. These things are hard to anticipate but can work to your advantage.
If you’re making a Roth IRA contribution, those funds will grow tax-free forever because you’ve already paid income tax on the money you’re contributing. If you consider the possible effects of the massive government spending being considered right now to help the economy, tax brackets seem likely to increase over the long-term. If that turns out to be true, the benefits of Roth IRA investing will only increase.
Second, this isn’t necessarily a bad time to make an IRA contribution just because the markets aren’t doing well overall. Most advisors would view this market downturn as an opportunity to buy shares at lower prices. This will depend on your time frame as the younger you are, the more time you have to wait before cracking your IRA without having to pay the early withdrawal (10%) penalty. Consider your longer-term objectives and try not to act with emotion.
Finally, amidst all of this turmoil, IRA investors at least have the option of self-direction, whereas 401k participants are at the whim of their retirement plans and its investment options. This can often mean higher expenses and more limited choices than one would normally expect. I get countless e-mails each month from readers who want to know if they can perform ‘in-service’ rollovers of their 401k funds into self-directed IRA accounts. While this would be logical considering that employees generally make the bulk of these contributions, in-service withdrawals are generally prohibited. The reason behind this is that some people (not all, but some) would make the silly mistake of investing their life savings in a penny stock or something along those lines which would be risky and irresponsible. Forcing an investor to buy shares through investment companies is, in theory, a protective measure.
As always, feel free to e-mail me with questions or comments.
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.