By Sia Hasan
Special to the Financial Independence Hub
If you have decided to invest in a self directed IRA (Individual Retirement Account: the American equivalent of Canada’s RRSP), you have taken the first step to enjoying a better financial future and to preparing for peace of mind in retirement. However, simply opening an IRA account is not all that it takes to benefit from this type of retirement account. If you want to maximize the benefits of your IRA fully, follow these helpful tips:
Choose the right type of Retirement Account
There are several types of IRA accounts that you can open, and two of the most common options are a traditional and Roth IRA. There are significant differences between these accounts. By learning more about these differences, you may be able to find the account type that is best for your financial planning efforts.
Both have similar contribution limits, but a Roth IRA uses money that has already been taxed as contributions. When you withdraw the money after you reach age 59 and a half, you can enjoy tax-free distributions. A traditional IRA, on the other hand, uses pre-tax dollars as contributions, and the money is taxed at a later date when you withdraw the funds. Depending on your current tax rate and your projected tax bracket in retirement, you may find one of these options to be far more useful than the other.. For example, if you expect to be in a lower tax bracket in retirement, a traditional IRA may be a better option for you because it minimizes your tax liability.
Maximize your contributions
If you want your account balance to grow at the fastest rate possible, you should make regular contributions into it each year. More than that, you should maximize your contributions annually to fully take advantage of the tax benefits associated with the account. Any additional investment funds that are available can be invested in another tax advantageous account or in a non-investment stock account.
Be aggressive in your younger years
With a self-directed IRA, you are in complete control over how your funds are invested. This means you can choose to take less risk or more risk. While taking more risk may sound unwise, the reality is that riskier investments generally have a higher return. In your younger years when you have decades before retirement, you can more comfortably take these risks with your investments. When risks are intelligent and moderated, you can grow your nest egg substantially in the younger years of your adult life. Then you can comfortably reduce your risk and return later in life without negatively impacting your financial security in retirement.
Diversify your portfolio
Another excellent tip to follow when managing your IRA is to diversify your portfolio. Many investors fall into a rut with their investment selection. For example, they may prefer to invest in equity mutual funds or growth stocks. It is best to diversify your portfolio into a wide range of investment types, such as CDs/GICs, bonds, stocks, funds and more. More than that, venture into different market segments. This means you should consider investing in the financial sector, the auto sector, the pharmaceutical sector and more rather than investing heavily in just one or two sectors. This will help you to moderate risk and can have a positive effect on how your nest egg grows in the years to come.
Making the decision to invest in an IRA is an excellent one that can put you on a strategic and beneficial financial path. However, you also need to follow the right investment strategy and choose the right type of IRA to open if you want to enjoy the maximum benefits possible from this effort. It is important to spend time educating yourself about the different account types as a first step. Then, actively educate yourself regularly about investment options so that you can make the most informed decisions possible.
Sia Hasan is a tech entrepreneur by day, and a freelance writer by night. Her passion lies in business technology, efficient and sleek programming, and customer relationship management. When she doesn’t have her nose pressed against her computer screen, you can find her spending time with the loves of her life, her two dogs, Pixel and Vector.