Q. I know I have until April 15 to invest in an IRA for tax year 2018. The stock market’s volatility is making me nervous because I don’t want to lose the money, and I plan to retire in five years. What should I do?
— Still working
A. You’re smart to pay attention to the market, but don’t panic just yet.
Let’s go over some background first.
Individual Retirement Accounts (IRAs) were created in 1974 to provide a tax-deferred savings option for employees who worked for companies that did not offer a pension.
They also provided a place to roll over retirement assets when an employee left a firm, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.
For 2019, the maximum IRA contribution is $5,500 for individuals under the age 50, and an additional $1,000 can be contributed as a “catch-up” for those age 50 and over.
The IRS has raised the contribution limits for 2019 to $6,000, but the catch-up contribution remains $1,000.
Contributions to a IRA can be made until the date that income tax returns must be filed, which is April 15, 2019 for 2018 returns.
With a short-time horizon of only five years, your concern about the recent stock market volatility and wanting to preserve the value of your investment is well founded, Mott said.
“As an individual nears retirement, it is often wise for a portfolio to become more conservative by reducing the exposure to stock-oriented investments and increasing the fixed income component by using individual bonds or bond mutual funds,” she said. “However, even bond funds can lose money because rising rates will often result in a decline in bond prices.”
If you won’t need the money from this contribution right away for many years, you probably don’t need to worry.
But if you think you’re going to tap this contribution early in your retirement, invest smart.
Mott said you may want to use certificates of deposit (CDs) to invest your IRA contribution for 2018 because they will provide a guaranteed interest rate and there will be no potential loss of principal.
“With the increase in interest rates that has taken place over the past two years, the yields are becoming more attractive,” she said.
If you go with CDs, it is often good to create a ladder of maturities when investing in CDs by purchasing similar amounts of varying maturities from 6 months to two years, Mott said.
“The risk of buying longer-term issues is the potential to lock in a lower interest rate for a long time period should we continue to see rates increase,” she said. “With a ladder, a portion of the account is always coming due and you can choose to roll it over or use it to meet a required distribution payment once you need to start taking them.”
Mott said most banks and credit unions will offer IRA accounts in which CDs can be purchased, or you can search online for other offerings.
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