Sifting Facts From the Confusion About IRAs

Tax-filing deadline is near. Do you know what you should do with your individual retirement account?

Unfortunately, many folks don’t. Financial institution hype and lingering tax reform confusion has left many investors with misconceptions about IRAs. Many are still eligible for IRA deductions but don’t know it. Others are eligible but should put their money in some other tax-deferred vehicle. Others put IRA money in all the wrong places.

Here are some of the most common IRA misconceptions:

“IRAs are the best way to defer taxes.”

Fact: Several tax-deferral vehicles are generally considered superior to IRAs. One is the 401(k) company savings plan. It allows you to contribute as much as nearly $8,000 each year on a before-tax basis--far more than the $2,000 IRA limit. And many companies match your contribution by as much as 50%--no IRA does that.

Another superior vehicle--if you are self-employed--is a Keogh plan. It allows you to contribute and deduct far more than the $2,000 annual limit on IRAs.

Also, if you cannot deduct your IRA contributions, consider tax-free municipal bonds or tax-free bond mutual funds. Their interest income accumulates tax free --rather than just tax deferred as in an IRA. And you won’t incur an early withdrawal penalty if you need to sell them to get cash.

“The safest investments, such as certificates of deposit, are most suitable for IRAs.”

Fact: Your IRA investment mix should be determined by your age and tolerance for risk. If you are younger and far away from retirement, you can and should take greater risks; invest at least some of your IRA in stocks, which have a higher potential for appreciation in the long run.

You can invest IRA money in stocks, bonds, mutual funds, junk bonds, U.S. Eagle gold coins, real estate investment trusts--almost anything except such risky investments as commodity futures. Indeed, advisers say, most investors’ IRAs are not diversified enough. You don’t have to have all your IRA eggs in one basket.

“If I have a retirement plan at work, I’m not eligible for an IRA.”

Fact: If you participate in a company retirement plan and your income exceeds certain levels, your IRA contributions are not deductible. But you can still have one. And the buildup of earnings in IRAs is always tax deferred. That’s a powerful advantage over taxable investments outside an IRA.

“I can’t invest in an IRA because I don’t have $2,000.”

Fact: You could put in as little as $1 to an IRA, although banks and brokerages usually require minimum contributions of at least $25. So don’t choose not to contribute to an IRA just because you don’t have $2,000 available at any one time.

“I must make my annual IRA contribution all at once and by the April deadline.”

Fact: You can contribute to your IRA any time and as often as you like, provided that your total contributions per year don’t exceed $2,000. However, contributions must be made before the April tax-filing deadline (April 16 this year) to be eligible for deductions on the previous year’s return. Some companies offer payroll savings plans that allow you to have a certain amount deducted from your paycheck and deposited automatically in an IRA.

“Once my money’s in an IRA, I can’t get access to it without incurring a tax and penalty.”

Fact: The law allows you to roll over IRA money once every 365-day period, and the money is not taxable to you--nor are you liable for the 10% early withdrawal penalty--as long as you roll it back into an IRA within 60 days. That, in effect, allows you to borrow short term from your IRA. Just be sure to put it back within 60 days.