For home improvement professionals, gone
are the days of plain old hammers and screwdrivers. For speed and convenience,
they rely on power tools. Americans saving for retirement should take a cue
from home improvement pros. Why use taxable investments or low-interest savings
accounts when you can plug into the power of an IRA?
IRA’s are a tremendous gift from our federal government. Being able to accumulate
savings without paying taxes on them each year increases the amount of money
you have to grow and compound. You can add even more power to your IRA through
two time-tested strategies: reinvestment and dollar cost averaging.
If you’re not yet eligible to take distributions from your IRA, your earnings
are automatically reinvested. But if you are eligible to take distributions,
why not reinvest them instead? To illustrate the power of reinvestment, consider
a one-time $2,000 investment in the Standard & Poor’s 500 on Jan. 1, 1989.
If you took your dividends each year, after 10 years your investment would be
worth $8,852. But with dividends reinvested, you account would have grown to
$11,575 – a difference of $2,723. And that’s just for a one-time $2,000 contribution.
Imagine the potential for added growth if you contribute and reinvest every
year. Now that’s power!
If your IRA is invested in stocks, you may be concerned about identifying the
right time during the year to make your contribution. Instead of trying to time
your investment, tap into the power of dollar cost averaging.
Dollar cost averaging (DCA) means investing a set amount each month. In this
way, you typically buy more shares when prices are low and fewer shares when
they’re high. Many investment firms offer dollar cost averaging into stocks
and other investments. This strategy can’t guarantee a profit or prevent a loss,
but it does help ensure you won’t invest all your money at the market high,
and it can lower your average cost over time. Dollar cost averaging involves
continuous investment in securities regardless of fluctuating price levels of
such securities. The investor should consider his or her financial ability to
continue this purchase through periods of low levels.
Now is a good time to own an IRA. Why? Because new IRA rules which recently
took effect can help you and your beneficiaries. Now you can put more money
in and you won’t have to take as much out. Let’s look at both sides of the IRA
equation, beginning with “put more in.”
You can now contribute up to $3,000 per year to either your traditional or Roth
IRA. This figure will gradually rise to $5,000 in 2008, after which the ceiling
will be indexed for inflation. If you are at least 50 years old, you may be
able to make catch-up contributions to your IRA. Increasing your contributions
means more security during retirement. An eligible married couple could contribute
$7,000 in 2002.
The ability to put away more money in your IRA provides you with some significant
tax advantages. By contributing to a traditional IRA, your earnings grow tax-deferred
and you may lower your annual taxable income.
While you can’t make tax-deductible contributions to a Roth IRA, your earnings
do grow tax free, provided you meet certain conditions. These higher contribution
limits can help you build your retirement savings. However, at some point you’ll
need to start taking money out of your IRA. You can make penalty-free withdrawals
as early as 59 1/2, but when you do, you’ll be taxed at your ordinary income
tax rate (assuming you took the withdrawals from a traditional IRA). So, if
you don’t really need the money, you could incur unnecessary taxes by making
these IRA withdrawals, so you may opt to delay them. You must start taking mandatory
minimum IRA withdrawals on April 1 of the year after you turn 70 1/2. In addition,
thanks to revised IRS rules, the definition of “minimum” has changed, allowing
you to take smaller annual distributions.
Under the old guidelines, you had to use complicated formulas to calculate minimum
withdrawals. If you picked the wrong method, you could end up taking out larger
sums than you wanted and facing an inflated tax bill.
The new withdrawal rules, however, are less complex. More importantly, they
may allow you to reduce your taxes and preserve a larger percentage of your
IRA for your heirs. The new guidelines employ either a "joint life expectancy"
calculation method or a "uniform table" calculation.
If your spouse is more than 10 years younger than you are, you can select a
joint life expectancy calculation. Spreading out the life expectancy in this
way can result in smaller minimum distributions.
If you don’t qualify for the joint life expectancy calculation, you’ll use a
uniform table that assumes your beneficiary is 10 years younger than you are.
This results in a smaller minimum distribution for married couples who are just
a few years apart in age and who name each other as beneficiaries.
Here’s another favorable change recently made to IRA's. Under the new IRS guidelines,
beneficiaries who inherit IRA’s can take withdrawals based on their life expectancies,
which could mean lower taxes along the way. Under the old rules, your children
or other beneficiaries generally had to withdraw all the IRA money in a short
time period, which could have left them with huge tax bills.
See your tax adviser before you begin taking IRA distributions. Although the
rules may have been changing in your favor, you still need to make the right
moves. Tapping into the awesome power of an IRA today can help assure that you
have a financially secure and fruitful retirement tomorrow. And isn't that what
we all want!
~ If you have any comments or questions, or if you would like to learn more
about how an IRA could help you and your family, please call Barry M. Moore
today at (909) 272-6820 or toll free at (888) 272-8166. Mr. Moore is an Investment
Representative for Edward Jones, a leading financial institution that has been
serving individual investors since 1871. Don't wait, call now.
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2003 10-4 Magazine and Tenfourmagazine.com
PO Box 7377 Huntington Beach, CA, 92615 tel. (714) 378-9990 fax (714)
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