My IRA Rollover - Expert advice on IRA Rollovers - Learn how to roll over your IRA.

The investment returns earned by your IRA assets will determine the size of your nest egg at retirement. For example, if you roll over $10,000 when you're 30 and invest it at a fixed rate of, say, 5% compounded annually, you would have close to $45,000 when you turn 60. But if you invest in a growth vehicle that averages 8%, you'd end up with more than twice as much, over $109,000, even if you never add another penny to the account.

And if the stakes are bigger the difference is even more dramatic. Let's say you retire at 60 and roll over an $800,000 pension distribution. The difference between 5% and 8% in compounded annual investment returns over 30 years is a difference of over $5 million! ($3,574,000 versus $8,740,000). Now, these numbers are provided as an illustration only; your investment returns could be very different, and it must be remembered that required minimum distributions at age 70-1/2 would begin to diminish the IRA. The point is that you should pay close attention to how your IRA assets are invested because it could make a big difference in your comfort level in retirement.

Putting together a well-balanced portfolio

If you have been personally managing your 401(k) account or other retirement plan, you are familiar with the concept of asset allocation and diversification. By investing retirement funds in several non-correlated asset classes, you have most of the bases covered. You don't need to worry about choosing the "right" asset class because you have a little money in each. If one asset class falls in value, the effect on your overall portfolio should be negligible because your money is spread among several different asset classes.

At the same time, it often makes sense to adjust portfolio holdings along with changes in the outlook for the markets and the economy. For example, if U.S. stocks appear overvalued and opportunities seem to be more promising overseas, you might want to allocate more of your assets to international stocks. This is called tactical asset allocation. Rather than sticking with the same allocations year in and year out regardless of what the markets are doing, investments get channeled where opportunities are more attractive. You're still diversified across asset classes, but the weightings change based on the outlook.

Tactical asset allocation requires a little more attention than a set-and-forget, buy-and-hold strategy, but it is not as active (or risky) as a market timing strategy. Market timers attempt to call the turns of the market, moving from stocks to cash and back again before each turn and are rarely successful. But a tactical asset allocation strategy that periodically adjusts portfolio weightings as opportunities present themselves allows you to capitalize on such areas as emerging markets stocks, global real estate, mid-cap stocks, and more. It's an interesting and exciting way to invest.

Prohibited transactions

This may be hard to imagine, but some people have tried to use IRA funds for assets which also could serve current personal objectives. Therefore, the IRS has defined a number of prohibited transactions which are simply not allowed in IRA accounts. If an IRA holder does engage in a prohibited transaction, the amount will be considered a distribution, subject to taxes and applicable penalties.

Here are some of the things you can't invest in with your IRA:

Artworks
Rugs
Antiques
Metals
Gems, jewelry
Stamps
Coins
Alcoholic beverages including wine
Certain other tangible personal property

One exception to the no-collectibles rule is that your IRA can invest in gold or silver coins minted by the Treasury Department and in certain gold, silver, palladium, and platinum bullion. Check with your IRA custodian to see if these investments are offered by the firm.

In addition, the following are examples of prohibited transactions concerning your IRA:

Borrowing money from it
Selling property to it
Receiving unreasonable compensation for managing it
Using it as security for a loan
Buying property for personal use (present or future)

The whole idea behind prohibited transactions is to preserve the spirit of the IRA, which is to save for retirement and get a tax break for doing so. The IRS doesn't want people using their IRAs to escape taxes on personal and business transactions, which is just common sense. Beyond these few restrictions, however, you are free to invest your IRA in a way that will help you grow your nest egg in accordance with your risk tolerance and time horizon.