How to Structure an IRA

The structure of your IRA should be balanced with your overall portfolio.
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An individual retirement account is a common type of long-term investment account that you can open at most banks or financial services firms. To get the most out of your account, you should plan the tax and investment structure of your IRA before you open it. The way you structure you IRA should be based on a number of factors, including your investment objectives, risk tolerance, employment situation and total investment portfolio.


In addition to the well-known traditional IRA, there are three other main types of IRAs. A simplified employee pension, typically referred to as a SEP-IRA, is a business retirement plan appropriate if you run your own business and don't intend to allow employees to contribute. A savings match plan for employees, or SIMPLE IRA, is a business IRA that allows employee contributions, part of which you will have to match if you are an employer. If you don't run a business, your IRA structure will most likely be either a traditional IRA or a Roth IRA. While a traditional IRA allows tax deductions for most contributions, a Roth IRA grants no such tax benefit. However, Roth distributions are usually tax-free, as opposed to the taxable withdrawals you would take from a traditional IRA.


The structure of your IRA might be affected by your employment situation. If you and your spouse are not covered by any retirement plans at work, you can create your own IRA and reap the tax benefits. However, if you have a plan such as a 401(k) at work, you may not be able to take a tax deduction if you open your own IRA as well. For couples filing joint taxes, the deduction is completely phased out above an adjusted gross income of $110,000, as of 2012. In this case, you might choose to structure your IRA as a Roth IRA, which grants no tax deduction regardless of your income.


All IRAs offer tax advantages on the earnings. Whether you structure your IRA as a traditional, SEP or SIMPLE account, you won't pay taxes on the earnings until distribution. You won't have to pay taxes at all with a Roth. However, the tax rate on your IRA distributions is your ordinary income tax rate. Because capital gains, such as those you can earn by buying and selling stocks, are usually taxed at a lower rate, putting stocks in a non-Roth IRA results in a tax disadvantage. As a result, some advisers recommend earning your capital gains outside of a traditional IRA, and investing in securities that pay ordinary income, such as bonds, within the IRA.


The structure of your investments in your IRA should complement your overall investment portfolio. If you have no other investments but your IRA, you should diversify the investments within your account to help balance risk and return. However, if you already have a balanced portfolio outside of your IRA, you can probably afford to take more risk in structuring your IRA investments.

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