IRA wise choice despite market

The Baltimore Sun

Still fiddling with your taxes and dragging your feet on making an individual retirement account contribution? Get in line.

Recent volatility in the stock and bond markets has made clients delay those contributions even more this year, experts said.

"Everyone is asking if they should really be putting money in the market right now, when nobody was asking that six months ago when prices were higher," said Ty Bernicke, a financial planner in Eau Claire, Wis. "Certainly it's a lot better to add to your accounts after a 20 percent drop, but Mother Nature has hooked us up to be poor investors" by programming people's brains to buy high and sell low, he said.

To be sure, plenty of scary news is out there trying to convince investors that stocks will go substantially lower before they turn around -- fear of recession, the virtual collapse of a powerful Wall Street investment banking firm and the mortgage market crisis.

But if you are still eligible to make IRA contributions -- meaning you are still earning income and meet other qualifications -- socking away some cash by Tuesday's tax-filing deadline is almost always a sound idea.

For 2007, the traditional and Roth IRA contribution limit is $4,000, or $5,000 with a catch-up provision for those 50 and older. Contribution deductions for traditional IRAs begin to be phased out for singles with modified adjusted gross income of more than $52,000 and for married taxpayers with modified adjusted gross income of more than $83,000.

Eligibility for Roth IRAs (which take in after-tax contributions but typically are withdrawn tax-free) phases out for married couples filing jointly who earn between $156,000 and $166,000 per year, and for single filers who earn between $99,000 and $114,000 in modified adjusted gross income.

So where to invest?

Before trying to handicap the best opportunities for growth, examine your asset allocation, experts said. Go through your retirement accounts and calculate the percentage devoted to stocks, bonds, cash and alternatives such as real estate and commodities.

Many planners recommend that clients with decades to go before retirement keep about 75 percent of their nest egg in stocks. That percentage tends to dwindle to about 50 percent by retirement. But your individual risk tolerance and life circumstances could dictate a different allocation.

If one area seems low, that is probably a good place to stash this year's contribution, financial planners said.

"There's almost no doubt that your allocation is different" from a year ago when you may have checked it last, said Brett Hammond, chief investment strategist for New York-based TIAA-CREF Asset Management.

In addition, your risk tolerance may have changed because of a new family or work situation, Hammond said.

"We hit a period in November where we started seeing large moves into fixed income," said Liat Rorer, product development vice president for E-Trade Asset Management.

In recent months, Rorer said, investors have been gravitating back to stocks, particularly those with large and midsize market capitalizations.

That may sound scary to market-weary investors, even those with a couple of decades to go before tapping retirement accounts.

"As long as they keep buying in down markets, it will take a while [to build wealth], but half or more of the value accumulated in a typical retirement portfolio comes in the last third of the years," said Charles Farrell, a financial adviser with Northstar Investment Advisors in Denver.

And while it is historically considered a better move to contribute to your IRA as soon as you are eligible, Farrell said he is not too worried about clients who feel the need to dribble money in slowly in response to the recent market volatility.

"I would move in piecemeal today. You don't know what the future holds, so go ahead and make smaller bets," he said, referring to the notion of making an IRA contribution to a cash reserve fund by the contribution deadline and then investing it in chunks over time.

Bernicke has been sticking with high-quality bonds with shorter maturities and certificates of deposit for clients close to or in retirement.

"Over 10 years or more, though, I'm a stock guy," Bernicke said. "I'm weighting heavier to value versus growth now and large cap instead of small cap."

Janet Kidd Stewart writes for Tribune Media Services.

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