Examining Your IRA and Thinking Inside the Box

Hello, everyone. This is your friendly neighborhood investing columnist, and today I’m writing about a subject that will make some of you say, “Duh! Everyone knows that.”

Trust me, not everyone knows this, and there’s no shame in that. If you read the next sentence and say “duh,” go read some food blogs; we’re trying to do some learning here.

Okay, here goes: Your IRA or Roth IRA isn’t an investment; it’s a type of account that contains investments.

I’m pointing this out because I often get questions like, “My IRA has been losing money. Should I close it and open another one?”

The box and the stuff inside the box

First of all, let’s stipulate that when I say “IRA,” I’m talking about both traditional and Roth IRAs. For this discussion, the difference is irrelevant.

An IRA is like a cardboard box. You can put stuff into the box anytime, but you’re not supposed to take it out until retirement. As long as you follow that rule, you get a significant tax break.

But it’s just a box. Say you have an actual cardboard box at home. You can put cans of soup in it, or you can put plutonium in it. If you put plutonium in the box, something bad might happen, but it has nothing to do with the box.

What kind of stuff can you put in the IRA box? Most of the common types of investments: stocks, bonds, mutual funds, and ETFs.

Who cares?

Why does the distinction matter? Because if you don’t like what’s happening inside your IRA, you have lots of options for fixing the problem without taking stuff out of the box, which angers the IRS and your future retired self.

So, in answer to the question about whether you should close your IRA if you don’t like its performance: never. But you can fix what’s inside the box or take the box somewhere else.

Here are a few common IRA complaints and potential solutions:

“My IRA is losing money or fluctuates wildly in value, and it’s driving me nuts.”

It’s not the IRA fluctuating; it’s the stuff inside the box. Your IRA is substantially invested in stocks, probably via an all-stock or target-date mutual fund. Stocks fluctuate; it’s just how they work.

You can lower the volatility (the jerky up-and-down balance changes) of your IRA by adding a bond fund or switching to a less-risky target date fund to bring it in line with your risk tolerance.

Or you can use Mint to look at your overall investment portfolio: if you have, say, more stocks in your IRA and more bonds in your 401(k), your balance might be more stable than you think.

“I’m getting charged too much in fees and expenses on my IRA.”

It’s probably the stuff inside the box overcharging you, not the IRA itself. If a “free” financial advisor set up your IRA, the advisor is probably being paid via those investment fees and expenses.

You can take your box and transfer it, tax-free and penalty-free, to a low-cost mutual fund company. Of course, you’ll also lose out on the “free” advice.

“I have more than one IRA, and it’s confusing.”

You can maintain IRA accounts at different companies, but the IRS considers them all part of the same IRA (well, assuming they’re all traditional or all Roth IRAs). It’s still one big box.

For example, if I have an IRA at Edward Jones and another one at Schwab, each one could contain different investments, and it would obviously be two different accounts, but it’s all one IRA.

You can always consolidate your IRAs into a single account at a single company without paying taxes or penalties, although the brokerage or advisor you leave behind might charge a small fee for closing an account.

Think inside the box

For many people, a traditional or Roth IRA is their introduction to the world of investing. Stock and bond investments are, obviously, different from a savings or checking account: if $100 is missing from your checking account, you probably went on a spending binge during one of your blackouts (hmm, maybe that’s just me). If $100 is missing from your IRA, that’s investing.

But, for the last time (finally!), it has nothing to do with the IRA. You can make safe, risky, dumb, or smart investments inside or outside the box, but you only get a tax break if you do it inside the box. Which gives me an idea for a bumper sticker: IRA investors…well, you know the rest.

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.