I’m a bit late, but I usually like to check my IRA asset allocation and see if I need to make any adjustments to contributions. I made a few tweaks, but I’m pretty much keeping to my plan.

Asset allocation has a big impact on your account’s performance. You basically determine your assets allocation on factors, such as:

• Time -How long will it be before you retire and start withdrawing? The longer you have, the more risk you can take.
• Risk Tolerance – Some people are naturally more conservative than others. If the recent ups and downs have you wondered, then you may not want to put all you money in emerging markets for example.

Not Too Late to Contribute

Don’t get discouraged if you haven’t opened an account up. It’s still not too late to contribute. You have until you file taxes to make your contributions. If you file your taxes mid February 2011, you can make contributions that count for 2010 until mid February.

How much can you contribute to your IRA?

Right now you can contribute $5,000/year to a Roth IRA if your modified AGI is :

• $167,000 for married filing jointly or qualifying widow(er),
• $116,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
• $10,000 for married filing separately and you lived with your spouse at any time during the year.

Source: IRS Publication 590

Curious to Learn More?

Mike has some great posts here on getting the right asset allocation for you.

• Know Your Asset Classes
• A Closer Look at Fixed Income Assets
• Invest in the Market When People Have Chickened-out
• What Are My Other Investing Options?

Don’t be afraid to ask others about what they’re asset allocation is and how they chose it. While there are some principals people should follow with how they design their portfolio, there is a lot of leeway based on individuals risk tolerance.

If you don’t have the time or interest in adjusting and balancing your portfolio, you may want to check out a target retirement fund. It is supposed to adjust as the years pass and it will become more conservative the closer you get towards retirement.

How are your retirement accounts doing? What’s your current allocation for your investment account? Are you going to change them?

What exactly is asset allocation and why is it important?

In short, your asset allocation is your plan for your investment contributions. How are you going to invest? Are you going to put it in stocks, mutual funds, bonds, ETFs, etc? While that may seem like a simple decision to make, it carries risks and rewards.

Historically, while stocks tend to perform well in the long run, it’s volatile in the short term. Bonds offer less risk in volatility but you also tend to get a smaller return. It’s a trade off you have to weigh for yourself and budget accordingly. Having the proper asset allocation means adjusting your allocation to fit your goal of either aggressive growth in the long term, stability of your money in the short term (for people retiring soon), or somewhere in between.

If you’re retiring in a few years, you want to be be conservative and not have most of your investments in stock. Your focus is probably going to be on stability as you’re planning on living off of it for a couple of decades. I have decades before I retire, so I’m focusing on more aggressive mutual funds.

My Roth IRA’s Asset Allocation

I currently have my Roth IRA at Sharebuilder and it’s been pretty cheap to keep it there. However, there are plenty of options if you’re looking for a place to open up an IRA:

• E-Trade (Annual fee and minimum are waived when you sign up for electronic statements)
• Vanguard (Some funds require $3,000 minimum)
• T. Rowe Price
• Charles Schwab ($1,000 minimum is waived if you direct deposit $100/month)

Right now, here’s what the asset allocation is:

I have a decent amount in cash because I want to buy into a Vanguard mutual fund, but they have a large minimum to purchase. I’ll probably pick it up next month.

Ask Reader’s Thoughts

How are your retirement accounts doing? What’s your current allocation for your investment account? Are you going to change them?

If you haven’t gotten started, now is a great time to start. The sooner you start saving for retirement, the better compound interest will treat you when you retire.

It’s been a while since I shared how my Roth IRA was doing. I checked my retirement account in October 2008 and shared how it went down over 20%. That certainly stung, but I didn’t withdraw money in reaction to the market. 

Since I’m investing for the long term, I realize that sometimes you have to accept the losses.

I’m happy to say things can climbing back up slowly. Here’s a screenshot from Mint of my Roth IRA’s returns for the last 6 months:

It looks good, but I’m anticipating more ups and downs with this market as I invest for retirement. 

Talking a bit more about the fluctuating returns of the stock market, here’s some information from Behaviorial Gap on the average returns from the stock market:

Individual retirement accounts allow you to easily set aside money for your retirement with some tax benefits.

What is the difference between a Roth IRA and a Traditional IRA?

Wikipedia defines Traditional and Roth individual retirement accounts:

• Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free. Named for Senator William Roth.
• Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income.

As you can see, Roth IRA withdrawals are tax free while traditional IRA withdrawals are taxed.

How much can you contribute your Roth IRA?

The IRS has specific income limits with contributing to Roth IRAs. Right now you can contribute $5,000/year to a Roth IRA if your modified AGI is :

• $169,000 for married filing jointly or qualifying widow(er),
• $116,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
• $10,000 for married filing separately and you lived with your spouse at any time during the year.

How much can you contribute your traditional IRA?

Traditional IRAs have a different income limits with contributions. Right now you can contribute $5,000/year to a traditional IRA if your modified AGI is :

• More than $85,000 but less than $105,000 for a married couple filing a joint return or a qualifyingwidow(er),
• More than $53,000 but less than $63,000 for a single individual or head of household,
• Less than $10,000 for a married individual filing a separate return.

Where can you open an IRA?

The good news is many banks, brokerages, and credit unions offer both traditional and Roth IRAs. Some charge a flat fee for the year, some take a fee for each transaction made, others can take a percentage, and some do all of this.

The idea is to keep your fees as low as possible and get the best performance.

Some online options for opening an IRA:

• E-Trade (Annual fee and minimum are waived when you sign up for electronic statements)
• Vanguard (Some funds require $3,000 minimum)
• T. Rowe Price
• Charles Schwab ($1,000 minimum is waived if you direct deposit $100/month)
• Sharebuilder (No minimum to open; no admin annual fee)
• Zecco( No minimum to open; $30 annual fee)

The sooner you start the better. It’s generally accepted that the sooner you start the better compound interest will treat you.

More Information on Individual Retirement Accounts

• Which IRA is the Best Deal? (Get Rich Slowly)
• The world’s easiest guide to understanding retirement accounts (I Will Teach You to Be Rich)
• Save Now, Retire Rich (Free Money Finance)
• How Much Money Do You Need For Retirement? (The Simple Dollar)
• Determine your Retirement Needs in 3 Easy Steps (Moolanomy)

My Retirement Account Update 

I checked my retirement account today, just to see what shape it is in. I knew it was going to be down, but I didn’t he an exact number. I check my portfolio in detail about once a quarter. So far this year, my portfolio is down 21.07%. I’m not happy about it, but I’m not panicking. 

Looking at the big picture we see that the average return from the stock market has been 11.69% from 1928 to 2007. Past performance doesn’t predict future prospects with certainty, but it does give us an idea of what to expect. 

Another reason I’m not going to pull money out of my retirement fund is because I’ll be hit with tax penalties.

How Dollar Cost Averaging with Investing Helps

Each time you invest, you’re buying a bit at a time. Many choose to automate their investments at a fixed rate. The same amount is spent but the amount of shares you buy changes. I like index funds and when the price is low, I can get more shares for the same price I’ve been putting in.

As time progresses, I’m hoping that overall my investments will grow and put me in a better position to retire (either earlier or have more cash).

Photo Credit:  NessieNoodle