Contributing to a traditional IRA or a Roth IRA by April 18 (or April 19 for Maine and Massachusetts residents) is your opportunity to cut your 2021 income taxes with a traditional IRA or get tax-free growth with a Roth, assuming you’re eligible.
It’s also a great time to review how you are investing your IRA funds to see whether there are better options available. Revisit your asset allocation and consider rebalancing if you’re too concentrated in equities.
By expanding your horizons, you may craft an investment strategy that will give you better growth without exposing you to unacceptable risk.
I won’t cover well-known strategies, such as domestic and foreign equities, bonds, CDs and commodity ETFs. All of these can fill a valuable role in a diversified portfolio to keep ahead of inflation. I’ll stick to my expertise — annuities — and cover why they can be a valuable addition to your IRA plan and asset allocation.
Annuities cannot all be lumped into one category. Some annuities let you invest your assets in stock funds. Some behave like certificates of deposit. Some provide a guaranteed stream of lifetime income. Some combine growth potential without downside market risk. I won’t cover variable annuities because I believe they’re not optimal for IRAs.
Unlike variable annuities, fixed annuities all guarantee principal or income. Underwritten by life insurers, they have one thing in common: You won’t lose money in them due to market downturns. That’s because the issuing insurance company bears all of the investment risk. None of them can give you the kind of eye-popping returns you might get from growth stocks, but you eliminate the downside.
Fixed-index annuity: Upside potential without downside risk
This is the only financial product that offers market-based growth potential while still guaranteeing your principal. Fixed-indexed annuities are a distinct asset class, as they have some characteristics of both equities and fixed-income investments.
They pay a share of the gain as an annual interest rate credit when the stock market goes up. In exchange for the guarantee that you’ll never lose money, you may get only part of the market’s annual gain as measured by an index such as the Dow Jones Industrial Average or S&P 500.
If the market index is negative for the year, you’ll typically get no interest.
Experts expect the product to produce long-term returns that exceed those of bonds or fixed-rate annuities while trailing equity returns, but without market risk and volatility. You need to be willing to withstand some interest-rate uncertainty, however. Optional guaranteed lifetime-income and/or withdrawal-benefit riders are commonly available for an additional fee. Indexed …….