IRA tasks to do before the year ends

By Robert Powell, MarketWatch

BOSTON (MarketWatch) — It’s not enough. The average balance in an IRA would fund less than two years of retirement for the average American and represents not much more than 5% of the income a person needs to maintain a decent standard of living.

The average IRA account balance in 2008 was $54,863. The average IRA individual balances — all accounts from the same person combined — was $69,498.

Despite what might seem like paltry balances, IRAs in the aggregate are an incredibly important piece of the retirement puzzle, since they hold the largest single share of the $13 trillion in U.S. retirement assets.

Your IRA, your own piece of the retirement puzzle, whether paltry or not, requires some tender loving care, especially during the last few months of the year. Here’s a list of what you might need to do before 2011.

Who’s your beneficiary?

Here’s some well-worn but can’t-be-repeated-often-enough advice: Review your beneficiary designations. Make sure there is both a primary and a contingent beneficiary named on the beneficiary designation form.

If there is no beneficiary named, the IRA proceeds will go to the estate and lose the tax advantage.

It’s especially worth checking your beneficiary designations if you’re divorced, recently or ever. Make sure your ex-spouse has been deleted as a beneficiary, unless you want them to remain as a beneficiary. The U.S. Supreme Court has recently ruled that the beneficiary named on the beneficiary designation form trumps divorce.

Make sure your custodian (i.e. the Investment Company) has a written copy of your beneficiary designations.

Turn wealth into income

Right about now, the Social Security Administration is sending you a report that tells you how much income you’ll receive in today’s dollars when you retire. Write down that number on a piece of paper.

Now, total up the value of all IRAs and 401(k)s in your household and multiple that number by 0.04. That number is the amount some experts say you could withdraw from your retirement in today’s dollars.

Now, add that number to your Social Security benefit figure, and then subtract that amount from your income. The results are roughly the amount of money you’ll need from other sources — such as work, pensions, reverse mortgages, life insurance or inheritances — to enjoy a lifestyle similar to what you have today.

Let’s use some round numbers as an example. Say you have household income of $100,000. You expect to receive $25,000 per year from Social Security and withdraw $5,000 per year from your retirement accounts. Somehow you’ll need to come up with another $70,000 per year to live the life to which you are accustomed.

For some, the best way to close the gap will be to contribute more to their IRAs and 401(k)s, work longer, and lower their standard of living.

Review your investment plan

Consider updating your investment policy statement or plan. Make sure your asset allocation remains appropriate given your financial goals.

Also, rebalance your IRA if you haven’t done so within the past year. It’s best to rebalance your IRA in a holistic manner. That is, look at all your assets in all your accounts, taxable and tax-deferred.

In many cases, consider putting your fixed-income investments in your tax-deferred accounts and those investments that produce capital gains and dividend income in your taxable accounts. And while you’re at it, check whether you’ve bought or sold any inappropriate investments in your IRA accounts.

Since IRAs are tax-deferred vehicles, it makes no sense for them to hold ‘tax-preferenced’ investments such as municipal bonds and annuities.

Roll old 401(k)s to an IRA

If you have one or more 401(k)s sitting with former employers, consider rolling that money over to an IRA. You’ll generally get better investment choices, lower costs and more control of your investment assets.

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