With an IRA, you can choose investments that aren't available in your workplace retirement plan, such as commodities, individual stocks or certificates of deposit, giving you access to investment options that result in a more diversified portfolio.
A traditional IRA offers tax-deferred savings while a Roth IRA offers tax-free savings for retirement. But Roth IRA contributions are limited based on household income.
Rebalance your investments
It has been a positive year for stocks and bonds, with many emerging markets and commodities off to the races. Meanwhile, cash yields are hovering near zero. Given this variation in returns, your portfolio may look much different than it did at the beginning of the year. Outsized performance by some asset classes can distort your asset allocation widely from its intended target, so rebalancing your investments back in line with your goals and risk tolerance is a prudent step.
Rebalancing also enforces the discipline of buying low and selling high, as you'll be shifting some money out of the assets that have performed well and into those that have lagged on a relative basis. This also helps reduce the susceptibility of your portfolio to a sharp correction in the markets.
Rebalancing is a good habit to undertake each year, but it is particularly important in a year of volatile movements or disparate returns between asset classes.
Sign up for a flexible spending account
Almost everyone incurs costs for medicine, prescriptions and health insurance copayments. Perhaps you also have dependent-care expenses while you're working, or you have to pay commuting costs to get to work. If your employer offers a flexible spending account as part of your benefits, consider signing up.
A flexible spending account, or FSA, allows you to pay for medical, dependent care or transportation costs with pretax dollars set aside with every paycheck. By paying with pretax dollars instead of after-tax dollars, you're essentially getting a discount on all these expenses you regularly incur. How big a discount? It depends on your marginal tax bracket, but those in the 15 percent bracket are saving 15 percent by paying with pretax money instead of money that has already been taxed. Contact your employee benefits department to get specific information.
Consider a rewards credit card
Do you always pay your credit card balance in full? If so, you're the ideal candidate for a rewards credit card. With a rewards credit card, you are compensated in the form of cash back, airline miles or one of many other methods for everyday purchases you make. Identify what type of reward is most appealing to you and compare credit card offers based on what percentage of your purchases are paid out in rewards.
A 1 percent reward ratio is typical, but many credit cards exist that have higher payouts for certain categories of spending or for spending above a certain threshold. Finding the card that best fits your spending pattern can put hundreds of dollars per year in your pocket for expenses you'd incur anyway.
The keys to success are always paying the balance in full and resisting the urge to overspend just for the sake of the reward. Check out Bankrate.com to find the best card for you.
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