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Online Original: An Annual Checkup For Your Ira

January is the ideal time of year to make your annual contribution to an individual retirement account -- your 1999 contribution, that is. "It's best to put your retirement money to work as soon as possible," says Ross Levin of Accredited Investors in Edina, Minn. But the real decision many retirement savers face now is where to invest their 1998 contribution, since tax laws allow you to put off funding your IRA until the time your taxes come due -- Apr. 15 of the following year.

Regardless of which year you're contributing to or what kind of IRA you have, the decision-making process you need to go through is the same. Mutual funds are generally the easiest way to manage an IRA portfolio, since you can gain a great deal of diversification and access to foreign markets from a small investment in just one, or a handful of funds, says Tim Kochis, an investment adviser with Kochis Fitz in San Francisco.

Your initial move should be a review of how your current investments are doing. "When putting money in an IRA, it's always a good idea to first look and see where you have the money now," says Joel Isaacson, a New York City financial planner. If you're happy with your fund choices, you may simply want to add this year's contribution to a favorite fund. Simplicity is a virtue when it comes to investing, and you don't want to juggle dozens of funds. But if you have any mutual funds that have underperformed their peers and should be replaced, the nice thing about an IRA is that you can switch holdings without incurring any tax consequences.

RISKIER MOVES. Although it's easy to think of different accounts as unique portfolios, most individuals should invest their IRA in context of all their other holdings, investment advisers say. If your investments are so spread out that it's difficult to see where you stand, Isaacson suggests consolidating accounts with one financial service "supermarket," such as Charles Schwab or Fidelity. "When you add all your assets together, you may pay more attention to it than when it is split up in little pieces," he says.

In general, planners recommend taking more risk in your IRA than you would with money that isn't earmarked for retirement -- which means putting most of the money in stocks. However, says Kochis, if part of your overall plan calls for investing in fixed-income, it would be wise to hold those bonds in an IRA. Then the income generated by the bonds won't be subject to taxes each year and would grow much faster. Equity investors who favor a mixture of index and actively managed funds should put the actively managed ones in their IRA, since they tend to have more turnover and generate more taxable gains than index funds, planners say.

Many investors' portfolios are currently dominated by large-cap domestic stocks, which have outperformed other sectors in recent years. "Most people tend to be underweight small-cap and international," says Levin. So, buying funds that invest in areas of the market that had a tough time last year could be a good IRA move: Not only are the underlying stocks cheaper but you'll hopefully be able to participate when they recover.

"Large-cap growth has had a nice run here," says Isaacson. Instead, he suggests, take a look at value-oriented small-cap funds that might have had a bad time last year. He likes Heartland Value (HRTVX) and Strong Schafer Value (SCHVX). On the international side, Levin recommends Artisan International (ARTIX), which focuses on large-cap stocks, mainly in Europe. He suggests pairing that with Barr Rosenberg International Small Cap (ICSIX), a quantitative fund that provides a good diversification from large-cap U.S. stocks (as well as a high $10,000 minimum for IRAs).

THINK LONG-TERM. Emerging-market funds performed disastrously in 1998, and you might be tempted to buy such a fund on the cheap now. But with Latin America in turmoil and Asia not fully out of the woods, such a move makes sense only if part of your long-term plan calls for exposure to those risky markets. If it does, an IRA would be the place to hold the fund says Kochis. "For most people, that would be the riskiest kind of fund they own," he says. Putting it in an IRA could minimize the tax impact of high turnover and make it easier psychologically to withstand volatility since IRAs have such a long-term focus, he says.

The key with an IRA is to invest for the long-term, investment advisers say. Even though you can trade in and out of funds without incurring tax consequences, "with IRAs, it really makes no sense" to try to time the market, says Levin. Investors who pursued that strategy in 1998 may have gotten out before the worst of the summer correction, but few got back into the market in time to benefit from the fall's rebound.

This is the time of year to review your account holdings and invest new money wisely. Then you don't have to think about your IRA again until next January.

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