Some ways to get the most out of your IRA

By Robert Powell, MarketWatch

BOSTON (MarketWatch) — When it comes to individual retirement accounts, better known as IRAs, you might think you’ve got it all figured out. After all, these accounts have been around since 1974 and, with few exceptions, haven’t changed all that much. But that doesn’t mean you should neglect your IRA.

There are plenty of little-known and well-known-but-worth-repeating ways to get the most out of your IRA — strategies that you should revisit at least once per year. And tax season, when you’re trying hard to reduce your income tax bill, would be that time.

It's absolutely critical that you look at all the different ways that you can utilize your IRA instead of just using it as a parking ramp for qualified assets. If you use it right you really can maximize your accumulation and you can maximize your drawdown over time.

Here are some strategies to consider.

1. Consolidate accounts

If you have several IRA accounts, it’s time to consider consolidating.

Doing so will accomplish a few goals. One, it could save you money, especially if you have lots of IRAs with small balances scattered among various custodians. IRA custodians often charge an account-maintenance fee on IRAs with small balances so consolidating all those little IRAs could lower your maintenance expenses.

Two, consolidating simplifies your life. Instead of keeping track of 10 funds with 10 custodians, put all your funds with one custodian. Doing this will make life less complicated and it will make rebalancing your retirement assets easier.

And three, it may help you reach your goals. If you have a more convenient setup for your finances, you're more likely to actually be on track, to know what you have, and to figure out what you want to do.

2. Asset allocation and asset location

Odds are high that if you have lots of IRA accounts and one or two 401(k) plans, you’ve got some duplication of asset classes.

What’s more, it’s quite possible that your overall asset allocation might not be what you think it is, given all the funds in all your various accounts.

Look at IRA accounts in one of three phases. First is the accumulation phase.

When you are accumulating there are a couple key questions that people should consider. One, are you putting your assets in the right place at the right time in your IRA and two, are you making sure that you are coordinating that with your other accounts?

The advice: Evaluate all of your funds in all your accounts, both tax-deferred and taxable, with the aim of eliminating duplication and locating your assets in the right accounts.

For instance, if, after creating a personal investment policy statement, you want 80% in fixed income and 20% in equities, make sure that’s what you have. Not just your IRA or just your 401(k). It’s quite possible that you unwittingly have two funds with the same investment objective in your 401(k) and your IRA.

Also, consider putting fixed-income securities, those that generate ordinary income, in your tax-deferred accounts and those subject to capital gains and qualified dividend tax rates in your taxable accounts to the degree possible. The experts refer to this tactic as “asset location” and say it can help you boost your overall return.

Look at your IRA as part of a larger portfolio instead of as a discrete entity.

In addition to diversifying your assets and locating assets in the right types of accounts, consider what some experts refer to as “tax diversification” by having both a traditional and a Roth IRA. Doing so gives you the ability to withdraw money from the account that leaves you with the most after-tax income. That’s because distributions from a Roth IRA are tax-free, while distributions from a traditional IRA are taxed at ordinary income tax rates.

You might not think you need to have a Roth and a traditional IRA, but if nothing else you should examine the difference between them to determine what might be appropriate for you in your situation.

Another advantage to having a Roth IRA: The contribution can be withdrawn at any time without a tax penalty. The flexibility of being able to take out the contribution from the Roth takes away the hesitation that folks may have about not wanting to tie their money up for such a long time.

3. Fund both an IRA and 401(k)

Many folks saving for retirement often overlook the fact that they can, depending on their adjusted gross income, fully fund their 401(k) and contribute to an IRA too, Grant said.

For instance, if you are covered by a retirement plan at work and your tax filing status is married filing jointly, you get a full deduction for your IRA up to the amount of your contribution limit if your modified adjusted gross income, or MAGI, is $92,000 or less.

If your MAGI is more than $92,000 and less than $112,000, you get a partial deduction. If your MAGI is $112,000 or more, and you’re under age 70-1/2, consider making a nondeductible contribution to a traditional IRA.

People think if they have a 401(k), they can’t have an IRA. But there really is a lot more flexibility.

4. Don’t forget to catch up

The maximum contribution you can make to a traditional or Roth IRA is the smaller of $5,000 or the amount of your taxable compensation for 2012. This limit can be split between a traditional and a Roth IRA but the combined limit is $5,000.

But if you are age 50 or older before the end of 2012, the maximum contribution to a traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2012. This limit can be split between a traditional and a Roth IRA but the combined limit is $6,000.

There are still many Americans who are either unaware of the so called catch-up provision for taxpayers age 50 and older, or who don’t know all the facts about it.

5. Fund the non-working spouse’s account

You might be able to set aside some money for retirement by using a spousal IRA.

According to the IRS, for 2011 if you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following two amounts: $5,000 ($6,000 if you are age 50 or older), or the total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts:

• Your spouse's IRA contribution for the year to a traditional IRA, and

• Any contributions for the year to a Roth IRA on behalf of your spouse.

This means, according to the IRS’s website, that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $10,000 ($11,000 if only one of you is 50 or older or $12,000 if both of you are 50 or older).

6. Draw down from the right accounts

You can make the most of your IRA by withdrawing your assets from the right accounts during the distribution phase.

It’s important to understand which buckets of assets you should draw your money down from first.

For those over age 70½, consider taking your required minimum distribution, but then — to the extent you can — withdraw money from taxable buckets and let the money in the tax-exempt or tax-deferred accounts grow.

The order in which you take money or you draw money down is important and can have an impact on how long your money lasts.

7. Leaving a legacy

Many people are unaware that you can leave your tax-qualified assets to a charitable organization. Doing so provides some tax benefits to the charitable organization.

Plus, it is a nice way to give if you are thinking about your estate planning.

8. Inheriting an IRA

Last but not least, knowing the ins-and-outs of an inherited IRA could help save a bundle.

People need to understand that there are number of options for them and certainly they may want to look at maintaining an inherited even for a non-spouse beneficiary.

Keeping that IRA as an inherited IRA or a beneficiary IRA, they can stretch the distributions out over their lifetime and minimize the tax impact. And that could be another source of income in retirement for that beneficiary.