||Ask the Dollar Diva
What should I do with an IRA
Dear Dollar Diva,
What is available for my IRA rollover other than a direct rollover
to an IRA CD? The return on CDs is relatively low.
I am unemployed and do not expect to make any more
contributions this year.
Can I invest half in a mutual fund and leave the other
half in the IRA? I have not rolled this money over yet and need
advice soon. The amount is about $2,500.
You are smart to reconsider your Individual Retirement
Account options. If you will not need this money within the next
few years, you should consider an investment that will give you
a better return.
You are also smart to know that you should do a direct
rollover from your current bank to whatever investment institution
you choose for your new IRA. If you close the account and the money
is sent to you, the bank is required by the Internal Revenue Service
to withhold 20 percent for taxes, and then you're taxed on the rest.
As you roll over your funds, you have a new opportunity
to reallocate your money, according to your tolerance for risk and
your age. In general, the closer you are to retirement, the less
money you should put in risky investments.
Here are some of the common investment types, beginning
with the lowest risk and ending in the highest:
- Low risk/low return: Money market funds and
current income from U.S. Treasury issues and other safe investments.
- Bond funds: For current income from bonds.
- Balanced mutual funds: Comprised partly of
stocks, partly of bonds for income and some growth.
- Equity income mutual funds: For income and
growth from stocks.
- Growth and income funds: For current incoome
and potential long-term growth from stocks.
- Growth funds: For long-term growth of capital
The Diva recommends that you do not split the $2,500
into multiple accounts. Many of them charge an annual fee, and you
don't need to think about diversification until you have more money
accumulated. Also, you will have a better selection of funds to
choose from if your initial deposit is larger.
The Diva also suggests that you consider a higher-risk
investment if you will not be withdrawing your IRA money for at
least 10 years, and a lower-risk investment if you will be withdrawing
your IRA money within the next few years.
-- Posted: Dec. 14, 1999