Options and opportunities for IRA contributions

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Farm Forum

In my last column, I touched lightly on IRA’s and how they can help with our tax bills. Most of you have competent tax advisors that can make recommendations as to the best use of the tax codes. The real dilemma lies in where to place this money. I would like to respectfully point out that it may not always be in your best interest to blindly accept the often biased direction of accountants and tax advisors who send you down the hall or across town to their buddies to handle your IRA contributions. I realize it may be convenient, but the check absolutely does not have to be written the day you finalize and file your taxes. You have until April 15 to make your contribution, and it just makes sense to explore all of your options, as you have plenty of time. Particularly if you have saw enough of underperforming investments or those that may have done well in an up market, but the continued risk of considerable loss is a cause of concern for you.

As previously mentioned, equity indexed annuities (EIAs) offer the unique combination of opportunity for decent returns combined with safety. I will give you a brief overview of how they manage to do this. First of all, be aware that EIA’s are considered safe money as there is absolutely no direct participation in the market, returns are just based upon an index’s performance. There are also very strict rules and reserves imposed by the NAIC that help to ensure your money is safe no matter what the prevailing economic conditions are.

Now that our safety concerns are satisfied, how exactly do we make some money? The insurance company buys options on any number of stock market indexes of which you have a choice. The S&P 500 would be a prime example and the most used. When the indexes are positive, the insurance company then exercises these options and credits interest to your account based on the resulting gains and your chosen crediting method.

The company guarantees the bottom of your contract so all of your principal and all of your gains are always protected. Please note, that the only charges the company will need to take are off the top and only when there are gains to be had so as to be able to provide these guarantees and assure solvency. This amount is contingent on which crediting methods you choose. Depending on the company, some are straightforward, easily understood, and fair. Others can be confusing without proper guidance. I always go with the more common sense approach, as folks quickly comprehend exactly how things work and in turn are comfortable and confident. Please be aware that 100 percent of your money and the gains are at work for you from day one and there are no annoying and detrimental fees like you would see with mutual funds. Find an advisor who has the knowledge and integrity needed to properly educate and advise you.

Next, I will address the interesting and overlooked EIA option of placing some or all of your funds into a fixed interest account. I will also explain how a negative year in the markets can actually have a silver lining and prove quite positive for you and your EIA.

Dennis Foster has been helping Families with Financial and Estate Planning needs for over 20 years. He welcomes comments and questions and can be reached at 605-887-7069 or dennis@nvc.net. The information provided is intended to be of a generic educational nature. Seek professional advice for your specific situation.