Simply put, your investment risk tolerance is the amount of stress you experience when your account declines. In other words, how do you feel if your account declines five percent? How about 10 percent? What about 20 percent?

If you invest too aggressively for your risk tolerance, then at some level of decline you may reach a breaking point. When that point is hit, many investors feel the need to sell their investments in order to protect themselves. As a result, they make the classic mistake of selling out right at the market bottom just before the market rebounds. This causes them to lock in their losses and miss out on future gains.

To assess your risk tolerance level, please take Paragon’s Risk Tolerance Survey.

The following article discusses different points to be aware of your own individual risk tolerance.

What’s Your Risk Tolerance?

By Miranda Marquit

To view the entire article, please visit money.usnews.com

Self-knowledge is one of the best tools you have when you invest. Understanding yourself can help you build a portfolio that works for you, and it can keep you from acting impulsively in a way that damages your long-term returns.

What is Risk Tolerance?

Risk tolerance is just what it sounds like: A measure of how much risk you can handle as an investor.

There are some of the factors that go into your risk tolerance:

What you can afford to lose: How much money do you have available? And how much of it can you afford to lose? This is about more than whether or not you have sufficient assets to handle capital losses; it’s all about whether or not you can have the money locked away. Can you afford to put $400 a month into an IRA without stretching your finances to the breaking point? If not, consider committing a little less.

Your time frame: The length of time remaining until you reach your goal matters when it comes to how much risk you can handle in your portfolio. Retirement is a good example. As you approach retirement, you have a lower risk tolerance, since you don’t have decades to rebuild if a riskier investment causes problems. Take into account the time frame in question as you determine your risk tolerance.

Your emotional ability to handle risk: Not only does risk tolerance include your financial ability to handle a certain level of risk, but also your emotional ability to deal with risk should be considered. If risky investments are going to stress you out to the point that it affects you in other areas of your life that can be an issue. It also matters if you are so risk averse that you never include investments that can grow your wealth.

Risk tolerance changes over time. Age, income, and circumstance all interact to form your current level of risk tolerance. As various factors change in your life, you will find that your risk tolerance rises or falls. Pay attention your current risk tolerance, and be aware of the way your feelings about risk are affecting your judgment.

Compensating for Risk Tolerance

Sometimes you have to compensate for your risk tolerance. If you have a high risk tolerance—particularly if you enjoy taking risks—it can lead to overconfidence in your investing. You might decide that you can “afford” a course of action that you really can’t. You might also try to invest in riskier assets and schemes, and overextend yourself.

Having a high risk tolerance might also make you more vulnerable to scammers. According “Outsmarting the Scam Artists,” by Doug Shadel, those with more assets tend to be those most likely to be scammed. Your penchant for risk, and the high returns that come with it, could spell trouble for your portfolio.

You need to compensate for this problem by dialing it back a little bit. Be sure to keep part of your portfolio in less risky investments to serve as a safety net. Also, be wary of new schemes and “opportunities” that might actually be scams.

On the other side are those with very low risk tolerance. If you have a hard time taking your investing outside of cash products and bonds, you could find yourself in trouble. You won’t be able to build wealth at a rate that will allow you to secure your financial future. To compensate for this situation, consider low-cost index funds.

The important thing is to know yourself. You need to be aware of your weaknesses when it comes to investing, and be honest about what’s coming if you expect your portfolio to provide you with long-term wealth.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

The following article discusses three basic investment strategies. While here at Paragon we have a different investment strategy, it is always good to review the basics.

Basic Investment Strategies

To view the entire article, please visit finweb.com.

Your investment strategy deals with the overall, long-term guidelines that you set up and implement in an attempt to ensure success in meeting your financial goals. Most strategies used to invest in the stock market fall into three general categories: fundamental analysis, technical analysis, or buy and hold the market. Let’s examine each technique.

The fundamental analysis approach is primarily concerned with value; it examines factors that determine a company’s expected future earnings and dividends as well as the continued dependability of those earnings and dividends. It then attempts to put a value on the stock accordingly. Therefore, an investor who uses this approach seeks out stocks that are a good value; in other words, stocks that are priced low relative to their perceived value. The assumption is that the stock market will later recognize the value of the stock and its price will consequently increase.

The investor who uses technical analysis attempts to predict the future price of a stock or the future direction of the market based on past price and trading volume changes. This approach assumes that stock prices and the stock market follow discernible patterns, and if the beginning of a pattern can be identified then the balance of the pattern can also be predicted well enough to yield returns in excess of the general market. Most academic studies of this approach have generally concluded that investing based on purely technical analysis does not work well.

The buy-and-hold-the-market approach is the benchmark against which any other approach to market investing should be measured. This strategy provides the returns that would be obtained by buying and holding the stock market, often defined as the Standard & Poor’s 500. Of course, no individual investor would likely buy all 500 stocks that make up the index (although this can be achieved by buying shares in an S&P 500 index mutual fund). By investing in a large number of well-diversified stocks, however, an investor can build a portfolio which closely resembles the S&P 500.

The buy-and-hold-the-market investment approach is used as a benchmark because no other investment approach based on analysis is valid unless it can outperform the market over the long run. When an investment produces a return that’s above the market return with the same risk, the difference between the two returns is referred to as an excess return. The excess return represents the added value of the approach that’s used.

The type of strategy that you ultimately employ will depend in large measure on your conceptual views of two basic stock market theories. According to the efficient market theory, stock prices reflect all publicly available information concerning that stock and so are extremely close to the true value of the stock. This is not to say that prices reflect the stock’s true value at all times, but that prices on average reflect the stock’s true value. Variations about this average price can exist. Conversely, the random walk theory (named for the seemingly random steps of a drunken person) expounds that these variations are unpredictable; sometimes they are positive and sometimes negative. As such, they are unpredictable; they cannot be used to obtain excess returns.

Therefore, the investor who believes that the market is efficient would see no point in pursuing the fundamental approach which seeks to find stocks that are selling significantly above or below their value, because the price very closely reflects the stock’s true value. Alternatively, this investor would concentrate on developing a more efficient portfolio rather than concentrating on specific stock selection, a portfolio that provides returns closest to the market’s return at a specified level of market risk. The investor simply determines the amount of risk that he or she is willing to bear and then builds the portfolio accordingly.

Investors who believe that the market is inefficient proceed on the assumption that variations in the way people receive and evaluate information cause the prices of some stocks to deviate significantly from their true value. Therefore, they see occasions for finding under- and overpriced stocks through diligent analysis, and believe that they’re able to outperform a buy-and-hold-the-market strategy.

Based on substantial research evidence, many analysts believe that the market often is inefficient, and that there are indeed opportunities for outperforming the market. The excess return potential generally appears to be in the range of 2 to 6 percent annually. Over a lifetime of investing, even relatively small additional returns such as this can lead to substantially greater wealth.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

The following article is pulled directly off of Paragon’s Website. This article goes through and explains Paragon’s Investment Philosophy.

The following article was pulled from the Charles Schwab Website. It describes how your taxes may change in retirement. Read on to see how this will apply to you.

Minimize Your Tax Exposure

Please visit schwab.com to view the entire article.

Your tax situation may change when you retire. The amount of taxes you pay will be impacted by the types of income-generating sources you are accessing:

Distributions from your workplace retirement plan and other tax-deferred savings plans. The money you save in your workplace retirement plan is deducted from your paycheck before taxes. Once you begin taking distributions, you are required to pay taxes on the income you withdraw. The government considers this a benefit to you because your income in retirement may be smaller than when you were working, so your taxes would be lower.

Income from Social Security. Social Security is taxed as ordinary income. If your income from all sources, including Social Security, is enough to be taxed, plan to pay taxes on it.

Income from taxable assets. Income from taxable CDs, money market accounts, investment accounts and other accounts is taxable, but not withdrawals on the principal. Once you start taking annuity income, it generally is taxable.

Income from employment. Employment income is taxed as usual, whatever age you are. But remember, if you take Social Security before your normal retirement age, earning a wage (even self-employed income) could reduce your benefit.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

It is that time of year again, tax season. The following article is about some investment strategies to help minimize the tax implications during retirement.  Read on to find out how.

How To Minimize Taxes On Your Retirement Income

To view the entire article, please visit forbes.com.

Nobody likes paying taxes. But what can be a mere annoyance while you’re working can be a major headache when you retire. That’s because taxes are generally the biggest expense in retirement and retirees often need every penny of income to make ends meet while leaving enough of a nest egg to ensure that they’re income will last as long as they will. Along those lines, we recently received a couple of questions about how to structure retirement income in order to minimize taxes in retirement. Here are some things to consider:

Location, Location, Location

No, I’m not referring to moving to a lower tax area (although that would help a lot too). I’m talking about the location of your investments. If you’re like most investors, you’ve probably made investment decisions about each of your accounts (employer’s retirement plan, Roth IRA, rollover IRA, and taxable accounts) independently.

The problem with this is that not all investments are taxed alike. Since cash and bonds are taxed at ordinary income rates, you’ll want to shield them from taxes in your retirement plans the most. Next would be mutual funds with a high turnover since stocks held for less than a year are also taxed at ordinary income rates. If you have gold or any other “collectibles,” they’re next since they’re taxed at a 28% rate.

If the lower tax on qualified dividends expires on schedule at the end of the year, you’ll want to shelter high-yield stocks and stock funds too. Since stocks held for more than a year are taxed at lower capital gains rates, individual stocks and low turnover mutual funds like index funds would be a lower priority for retirement accounts. Coming in last would be international stocks and funds since having them in retirement accounts disqualifies you from using the foreign tax credit to help offset taxes withheld overseas. The volatility of the last two groups also make them good candidates for a taxable account since you can sell them and write the losses off your taxes as long as you don’t repurchase a similar investment within 30 days of the sale.

However, don’t let the tax tail wag the dog by letting the size of your accounts determine your asset allocation. For example, if you have $300k in retirement accounts and $100k in taxable investments, this doesn’t mean you should have $300k in cash and bonds and $100k in stocks. Instead, start with the appropriate asset allocation based on your time horizon and risk tolerance. Then place them in your retirement accounts, starting with the most tax-inefficient investments. Let’s say your portfolio should be $240k in stocks and $160k in bonds. You’d start by placing the $160k of bonds in your retirement account, which allows you to invest the other $140k in your retirement account in stocks (starting with the highest turnover funds) as well as the $100k in the taxable account.

Do you have company stock in your 401(k)?

Before you start selling the stocks in your 401(k), there is a special rule to be aware of that allows you to pay the lower capital gains rate on the growth of your employer stock in your 401(k). (You still have to pay tax at regular rates on the total cost of that stock.) The key is that you have to take that stock out as an “in-kind distribution,” which basically means that you move it directly into a brokerage account instead of selling it first as most 401(k) distributions are done.  You also forfeit this option if you roll it into an IRA.

How young are you?

Speaking of IRAs, the next question might be whether to withdraw first from your IRAs, your 401(k), or your taxable account. The first timing factor is your age. If you retire in the year you turn 55 or later, you can take withdrawals immediately from your 401(k) without a penalty, but you’ll have to wait until age 59 1/2 to make penalty-free withdrawals from your IRAs (unless you take substantially equal periodic payments until the later of 5 years or when you turn 59 1/2). Keep in mind that you can always withdraw anything from your taxable accounts and the contributions from your Roth IRAs without penalty at any time and for any reason. Finally, when you turn 65, you can also access any HSAs you have for any purpose without penalty (although HSA distributions are subject to ordinary income tax if not used to pay for qualified medical expenses).

Will your tax rates be going up or down?

The second timing factor is whether you see your tax rates going higher or lower in the future. For example, if you think the lower capital gains rate will expire at the end of the year, it could be a good time to take some gains out of the taxable account. If you’re more worried about higher income tax rates, take withdrawals from your pre-tax accounts or consider converting them into Roths, which means you pay the tax now at the relatively lower rate instead of at the higher future rates. Just be aware that you may need to spread those Roth conversions over more than one year so they don’t push you into a higher tax bracket and thus defeat the whole purpose.

Another reason to take withdrawals from your pre-tax IRAs and 401(k) accounts first is if you’re retiring early and haven’t started collecting Social Security yet. That’s because future withdrawals from these accounts could cause more of your Social Security to be subject to taxes and push you into a higher tax bracket. In this scenario, it could make sense to reserve the taxable accounts and nontaxable Roth IRAs for when you’re taking Social Security since they won’t have the same effect.

The reverse would be true if you’re receiving income from part-time work or a side business for the first part of your retirement. In that case, withdrawals from taxable accounts and Roth IRAs could be preferable since your tax bracket is likely to be higher than when you eventually stop working. Between the two, you’ll want to tap the taxable account first and let your Roth IRA continue growing tax free.

The Bottom Line

Unfortunately, there’s no way to eliminate taxes altogether, but you can use some of these strategies to minimize their impact on your retirement income. You can do this yourself or hire a financial professional who does proactive tax planning rather than just tax preparation. Either way, I hope these techniques can make this time of year a little less taxing for you in retirement.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

While we are in the midst of the tax season, it is always nice to learn of ways to maximize tax benefits. The following article describes ways you can maximize the tax benefits from contributing to an IRA.

How to Maximize the Tax Benefits of 401(k)s and IRAs

By David Ning

To view the entire article, please visit money.usnews.com.

Tax tips are always abundant this time of year. But it often takes a lot of precious time to figure out how to squeeze a bit more money out of Uncle Sam’s share. Instead, aim to take maximum advantage of one of the biggest and most common tax breaks: tax-advantaged retirement accounts. Here are a few ways to keep more of your hard-earned money for your retirement:

Maximize tax-deferred accounts each year. A Government Accountability Office report found that only about 5 percent of 401(k) participants contribute up to the limit. But many people ought to think about being more aggressive with their 401(k) and IRA contributions because tax-deferred growth is a great deal. The exact benefit will depend on the types of investments you choose within your tax-advantaged accounts. Over time, the money you are not paying in taxes each year will add up to a significant portion of your nest egg. So don’t miss out on the chance to contribute the maximum amount each year.

In fact, you can still max out contributions for tax-year 2012 if you haven’t done so already. The deadline to contribute to an IRA is not the end of the calendar year, but actually your tax filing date. For tax-year 2012, the deadline is April 15, 2013. So there is still time to claim this tax break.

And if you’ve already contributed the maximum for 2012, you should still try to maximize your accounts as early in 2013 as possible. After all, markets go up over time, and you want the tax-deferred growth to benefit you for as long as possible. Sure, there’s always the chance that the market will drop the second you contribute, but you will come out ahead on average if you always contribute early every year.

Get to know the matching rules for your 401(k). Some 401(k) plans won’t give you the full employer match if you don’t make contributions in every pay period throughout the year due to the formula they use to calculate the employer matching contribution. The details vary with each employer, but it’s best to work with the plan administrator to make sure you are going to get the full match if you front load your contributions. Otherwise, it’s probably best to stick with the strategy that guarantees the full match that is promised.

Consider a Roth IRA, even if you think your income tax rate will come down in future years. There are no mandatory minimum distributions for the Roth IRA while the owner is alive, which means more of the money can remain in a tax-free state longer. Depending on how long you live, the benefits of getting that money into a forever tax-free account can far outweigh the taxes you have to pay now.

Remember that IRA contribution limits are in addition to the 401(k) limits. Even if you don’t qualify for a Roth IRA due to making too much money, there’s a “back-door” way to make Roth contributions and enjoy the tax-free growth. You can contribute up to $5,500 (or $6,500 for those age 50 or older) to a non-deductible traditional IRA in 2013, and then immediately convert that amount to a Roth IRA.

Check out other tax-deferred options. I-bonds, EE savings bonds and 529 plans are all good candidates for those who want to keep more money working for them instead of Uncle Sam. Just make sure you understand what you are getting into before you shove a bunch of money into these types of investments.

This is a great time of year to be thinking about minimizing your taxes. But remember that tax tips may help you one time, but the tax-advantaged growth these retirement vehicles give you could benefit you for years to come.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

We all have heard that we should open up an IRA account and start preparing for retirement. But one has to ask, which IRA is best suited for them personally? Read the following article to learn more about the advantages of opening up an IRA.

Retirement: IRA Investment Advantages

To view the entire article please visit money.cnn.com.

As with a 401(k), you don’t pay taxes each year on capital gains, dividends, and other distributions from securities held in your IRA. Beyond that, there are different tax advantages, depending on which type of IRA you open.

There are two types: a traditional IRA offers tax-deferred growth, meaning you pay taxes on your investment gains only when you make withdrawals in retirement, and, if you qualify, your contributions may be deductible.

A Roth IRA, by contrast, doesn’t allow for deductible contributions but offers tax-free growth, meaning you owe no tax when you make withdrawals in retirement.

A traditional IRA comes in two flavors: deductible and nondeductible. To see if you qualify for a deductible IRA, which lets you deduct all or part of your contributions from your taxable income, use the following guidelines:

• If you have no retirement plan at work and you’re under 70-1/2, you can invest in a deductible IRA and deduct the entire amount from your taxes.
• If you have a 401(k) or other retirement plan at work, you may fully or partially deduct your contribution only if your adjusted gross income (AGI) qualifies. The deductions are phased out entirely for singles earning over $69,000 or couples earning over $115,000.
• If you’re not covered by a retirement plan, but your spouse is, you may qualify for a full or partial deduction if you file jointly and your AGI is below $188,000 for the 2013 tax year. (The same rule applies if you’re a non-working spouse of someone covered by a retirement plan at work.)

If you’re not eligible to contribute to a deductible IRA, you may be eligible to contribute to a Roth IRA if your AGI is below $127,000 if you’re single or $188,000 if you’re married and filing jointly. If you are above age 50, the maximum IRA contribution limit for 2013 is $6,500; otherwise, the max is $5,500.

If you make too much to qualify for a Roth IRA and are not eligible for a deductible IRA, a nondeductible IRA is a valid option. Your contribution won’t be deductible, but at least your savings will grow tax-deferred.

So which IRA is best for you? The nondeductible is the least attractive, so open one only if you don’t qualify for the other two. If you have a traditional IRA, you may want to consider converting it to a Roth in 2013, especially if you made non-deductible contributions.

The choice between a deductible and a Roth is more difficult, but generally you’re better off in a Roth if you expect to be in a higher tax bracket when you retire.

Plus, the Roth offers more flexibility: You are not required to make mandatory withdrawals from your account when you turn 70 1/2 — as you are with other IRAs — making the Roth a great way to leave money to your heirs.

Further, if you need the money before retirement, there are more opportunities for penalty-free withdrawals.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

With so much information out there about IRAs, people have to decide for themselves which IRA is good fit. The following article goes through the basics in selecting an IRA.

Tips For Finding The Right IRA

by Mark P. Cussen

To view the entire article, please visit forbes.com.

Since their inception in 1982, individual retirement accounts (IRAs) have grown to become one of the most popular retirement savings vehicles in America. Virtually every financial institution in the country offers this type of account, including banks, brokerage firms, independent investment advisers, life insurance companies and trust companies. However, knowing which type of account is right for you can be difficult unless you know exactly what it is that you need.

TUTORIAL:

Types of IRA Custodians
If you want to invest your IRA in CDs or other guaranteed instruments, then a bank or fixed annuity carrier is probably your best bet. If you prefer to invest in stocks or other securities such as mutual funds, then a brokerage firm or investment advisor will be able to meet your needs. Mutual fund companies also offer IRAs that invest directly in their own fund families. If you are content to invest with a single fund company, then this may be the most convenient option for you. There is probably no one “right” option for most people; many different institutions can do many of the same things. For example, most banks have investment consultants who can purchase mutual funds and other securities just like a conventional stockbroker or investment advisor, and many life insurance companies can offer IRAs that invest in mutual funds through a variable annuity contract.

Fees and Deductions
You should always find out whether or not your IRA charges an administrative fee of any kind. Many IRAs charge anywhere from $25 to $100 per year to cover administrative and custodial costs (this fee is often waived for customers with balances above a certain amount, such as $100,000 or $250,000). Of course, all IRA custodial fees can be written off on Schedule A of the 1040 form for those who are eligible to itemize deductions as a miscellaneous investment expense. Those who have created investment companies and make a business out of managing their investments can deduct these fees as an above-the-line business expense.

Custodial Services
Most IRA custodians will also now allow you to transfer money electronically to and from your account and will even calculate your required minimum distribution (RMD) for you and send it to you if necessary. Most custodians can send your RMDs on a monthly, quarterly or annual basis according to your wishes. However, most IRAs that are offered by institutions, such as banks, insurance and fund companies, will not allow you to buy certain types of investments, such as derivatives, oil and gas interests or real estate. If you want to do this, then you will have to use one of the self-directed IRA custodians that can facilitate this type of transaction. Therefore, in order to choose the type of IRA that’s right for you, you will need to have a clear idea of what types of investments you intend to purchase, what firms are willing to take custody of them and also the general level of fees that you are willing to pay for this.

Obviously, this is a fairly easy task in many cases. If you want to invest your IRA in CDs, then any bank will do. Just do some comparison shopping to see who has the best rates. Other times this is a more complex issue, especially for those who want to buy mutual funds or equities. A good deal of research may be necessary in order to determine the selection of investments that best meets your needs.

Traditional Vs. Roth IRA
One of the biggest decisions that IRA owners must make is whether to contribute to a traditional IRA that has deductible contributions and taxable distributions or a Roth IRA that has nondeductible contributions and tax-free distributions. In many cases, the Roth is the clear choice, especially for those in a lower tax bracket who will not benefit materially from the current deduction they get for their annual contributions. Roth IRAs also do not have mandatory minimum distributions that must begin at age 70.5.

The Bottom Line
There are several factors that can determine which type of IRA is right for you, including your tax bracket both now and at retirement, your investment objectives and time horizon, and the manner in which you plan to take your withdrawals. For more information on IRAs, download Pub. 590 from the IRS website at http://www.irs.gov/ or consult your financial advisor.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

The following article is from Charles Schwab’s magazine OnInvesting. The article discusses six mistakes to avoid IRA tax traps. Read on to learn how to avoid those costly mistakes.

IRA Tax Traps

To view the entire article, please visit oninvesting.schwab.com.

Americans hold a combined $5.2 trillion in assets in individual retirement arrangements (IRAs).  These accounts often provide tax benefits, which can make them a great way to build wealth for your retirement and your surviving loved ones.

Investors who contribute to a traditional IRA get an upfront tax benefit, if they qualify, by deferring taxes until they take withdrawals in the future. Others, if eligible, may open a Roth IRA and contribute after-tax money in exchange for tax-free distributions down the road.

Of course, tax rules are notoriously complex, so with these IRA tax benefits come tax pitfalls. On Investing caught up with Rande Spiegelman, Vice President of Financial Planning at the Schwab Center for Financial Research, to discuss common IRA misconceptions and the associated tax ramifications.

Says Rande of IRAs and taxes: “IRAs are great, but can be a real tax trap for the unwary. If you run afoul of IRS rules surrounding your account—even by accident—the penalties can be severe, all the way up to the disqualification and taxation of your entire account.”

Here, On Investing lays out six of the most common mistakes investors make concerning contributions, investments and withdrawals—and ways to fix or avoid them.

MISTAKE 1
Contributing Too Much
If you contribute more than the law allows in any year—based on contribution or income limits for your filing status, or age limitations²—the IRS will penalize you 6% of the excess amount for each year in which you fail to take corrective action. If, for instance, you contributed $1,000 more than allowed, you would owe $60 each year until you corrected the mistake.

Solution: Withdraw the excess amount, plus any earnings specifically tied to it, by the due date (plus extension) of your tax return for the year the contribution was made. Alternatively, you could recharacterize the excess contribution as a contribution to another IRA type before the due date (plus extension). For example, if you’re over the limit for a Roth IRA because of income restrictions, you still might be eligible for a traditional, nondeductible IRA.

If you choose to withdraw the excess contribution, note that the tax treatment for that withdrawal depends on when the money is removed (before or after the filing of the return) and whether or not the contribution was originally deductible. Regardless, any interest or income attributable to the excess contribution will be subject to income tax and a 10% penalty if you’re under age 59½.

“In some cases, an investor might choose to leave the excess contribution alone,” Rande says. For example, the amount might be so small that the 6% penalty isn’t worth the hassle of withdrawal or recharacterization, and you can count the excess as a deemed contribution in the next year.

MISTAKE 2
Prohibited Investments
Self-directed IRA investors should be aware that rules prohibit investing in collectibles, including artwork, antiques, metals, gems, stamps and coins.

You can use your IRA to invest in certain gold, silver and platinum metal coins minted by the US Treasury Department, and also certain gold, silver, palladium and platinum bullion. But if you invest directly in collectibles, the amount invested will be considered distributed in the year invested, and will be subject to applicable tax and 10% early-withdrawal penalty if the investment took place before you reached age 59½.

Owning real estate directly in an IRA isn’t prohibited, but you could find yourself engaged in a prohibited transaction if you buy and sell individual properties and are not extremely careful.

Solution: Unfortunately, there isn’t anything you can do to fix the mistake retroactively, so this is one error you’ll want to get ahead of. If you plan to invest in precious metals or real estate through your IRA, consider a real estate investment trust (REIT), or a specialized mutual fund or exchange-traded fund (ETF) to avoid direct investment.

MISTAKE 3
Prohibited Transactions
Regardless of what you invest in, you need to avoid prohibited transactions, since they could cause your entire IRA to lose tax-deferred status. Prohibited IRA transactions include borrowing money from it, selling property to it, receiving unreasonable compensation for managing it, using it as security for a loan, and using IRA funds to buy property for personal present or future use.

If you engage in a prohibited transaction, your entire account loses its IRA status and becomes a regular (taxable) investment account. The account is treated as having made a taxable distribution of all of its assets to you based on fair market value on the first day of the year, plus additional excise taxes in some instances. “This is as bad as it sounds,” Rande says. “Engaging in a prohibited transaction could mean the end of your IRA.”

Solution: Read the fine print on your account and check out IRS Publication 590 to help avoid prohibited transactions. If you’re still unsure of what you can and can’t do, consult a financial planner to avoid this potentially costly error.

MISTAKE 4
Restricted Rollovers
You can make unlimited transfers of your IRA funds from one trustee (usually a brokerage or financial services firm) to another in any given year. It’s when you take receipt of the money yourself that you face a number of restrictions. First, you have 60 days to redeposit it into the same or another IRA before it counts as a taxable distribution (plus penalty if you’re under age 59½). And, critically, you only get to roll over your funds this way once per 12-month period, per IRA. If you deposit the funds into another IRA and then attempt another rollover with the same accounts in a 12-month period, the withdrawal is immediately taxable.

Solution: Rande says, “If you need to switch custodians, play it safe and stick to the direct trustee-to-trustee transfer method.”

MISTAKE 5
Premature Withdrawals
If you take an unqualified withdrawal from your IRA before age 59½, you will incur a 10% federal early-withdrawal penalty plus ordinary income tax on any of the amount considered deductible contributions or earnings (state penalties may also apply). And even if you avoid the 10% federal penalty by taking a qualified distribution (such as to fund the purchase of your first home or to pay for higher education), you’ll still pay income tax. More importantly, you’ll have less money working for your retirement because you will lose out on some of the potential for compounded growth.

Solution: Seek out other sources for needed funds, such as personal savings or loans, first. Rande points out that investors should consider their retirement accounts as a last resort for anything but retirement. Remember, you can only contribute so much to IRAs annually, and may never be able to make up for lost ground.

MISTAKE 6
Missing Your Required Minimum Distributions
If you’re age 70½ or older, or if you’ve inherited an IRA from someone other than your spouse, you must take required minimum distributions (RMDs) from your IRA each year. Original owners of Roth IRAs are exempt from RMD rules. The penalty for failing to take your RMD is a 50% excise tax on the required distribution amount plus applicable ordinary income tax.

Solution: Make sure you take your RMDs on time. Investors must take their RMDs by December 31 each year. The one exception is the year you turn 70½, when you have the option of waiting until April 1 of the following year, though doing so means taking two distributions in one year and potentially increasing your annual income (and income tax rate).

The bottom line is, be careful. Before making any IRA decisions, do your homework, including consulting with your tax advisor. As Rande points out, “IRAs are powerful retirement tools that can help increase your wealth. But investors need to be aware of the tax traps and how to navigate around them.”

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

In preparing for retirement, there are a number of items to consider. The following article provides three simple steps to prepare for a fulfilling retirement.

How to Prepare for a Fulfilling Retirement

Please visit money.usnews.com for the entire article.

By Dave Bernard

Sooner or later, each of us will come to a point in our life when we cross over to join the ever-growing group of retirement-age people. Many of us will wonder how it is possible that we have become 65 years old. Hopefully the shock will be momentary, and we will get on with living.

Of course, to experience a fulfilling retirement life we have to plan and prepare for this moment. Rolling into age 65 without having taken the necessary steps to prepare can result in confusion, stress, and boredom. Worst of all, those who don’t prepare risk missing out on opportunities to take on inspiring second careers or exciting new hobbies.

It is not easy to plan and prepare for retirement when today already seems to consume 110 percent of our time and effort. One can easily become overwhelmed with the myriad of investment options and convoluted requirements for Social Security and Medicare.

Amid all of this complexity, there is one rule of thumb to understand and follow. It readily applies to financial preparations for retirement but also extends beyond that: Live within your means. Or to put it another way, don’t spend your money before you earn it. This rule of thumb can help you to focus your finances before and during retirement. Here’s why living within your means is the key to a fulfilling life before and during retirement:

You avoid adding debt. Buying on credit has been the downfall of many hard working people. Granted, there may be emergency situations where you have no choice but to break out the credit card to tide you over. The problem is buying things on credit you do not need. Spending money you do not have for something you want, regardless of whether you can afford it, is a recipe for disaster. A better course of action is to save up until you can pay cash instead of charging it. Don’t spend your money before you earn it. And don’t try to keep up with your neighbors by chasing more bright and shiny things. Debt avoidance is especially important in retirement when your income is reduced.

Saving becomes easier. If you are living within your means, when you get to the end of the month you should have something left over. Since you are not spending this residual you can put a portion of it aside into savings. If you continue to set aside a little something on a regular basis it will grow. However, if you are living beyond your means, this potential savings will go toward credit card interest or other black holes.

You discover what makes you content. Living within your means gives you a better understanding of what is most important to you. Instead of buying impulsively, you carefully weigh the cost and start to make better decisions. You realize it is not necessary to always eat at five-star restaurants. Suddenly Levi jeans look just as good as $200 dollar pants. A new house is not so critical if it will lock you into a big long-term mortgage. You start to grasp the reality that material possessions do not equal personal freedom. If you cannot afford it, you discover that life will go on and you can still be content.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.