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Cents and Sensibility Guy Steele |
Making IRA contributions
early has its benefitsNow that tax season is over, and you've made your final IRA contributions for 2002, it's time to start thinking about IRA contributions for 2003.
Of course, you do have until April 15, 2004 to fully fund your IRA for the 2003 tax year, so you might think, "What's the hurry?" But the fact is that the timing of your IRA contributions is important.
Why is that? First, consider that your Traditional or Roth IRA both offer tax advantages. Traditional IRA earnings grow on a tax-deferred basis, while a Roth IRA grows tax-free, provided you meet certain conditions. Consequently, the earlier in the year that you invest money in your IRA, the greater the benefits you'll receive from either tax-deferred or tax-free growth. Over a period of years and decades, the added growth you can get from making IRA contributions early can add up to a significant amount.
Of course, the investment vehicles within your IRA will not always increase in value. But you can't predict when they will start showing gains -- so it makes sense to be prepared for any upturns by being fully invested as soon as possible.
Furthermore, by fully funding your IRA as soon as possible, you may be able to follow a classic piece of investment advice: "buy low." As you doubtlessly know, the stock market has been in a prolonged slump. And, as a result, many high-quality stocks are now attractively priced. By investing in your IRA right now, you might be able to buy more shares of these stocks than you could if prices go up. Historically, the biggest stock market gains have been recorded in the first few months following a long bear market.
However, even if you want to put in the maximum amount to an IRA, you may question whether you can afford it. For 2003, you can contribute up to $3,000 to either a Traditional or Roth IRA; if you're 50 or older, you can also kick in an extra $500. It's not always easy for most of us to come up with $3,000 or $3,500 at one time. But by temporarily cutting down on other expenses, or looking at all your financial resources, you may be able to find ways to generate the money you need. And if you receive a tax refund, you've got a ready-made funding source for your IRA.
Once you've "maxed out" on your IRA, you may decide to look at other issues. For example, if you're like many people, you may have several different IRAs. While there's nothing wrong with this, it may not represent the most efficient use of your investment dollars. You may find it more advantageous to consolidate all your IRAs into one account. By consolidating IRAs, you'll get a clearer sense of just where your investment dollars are going. Consequently, you can determine if you're properly diversified, or if you have too much money placed in investments that are substantially similar.
Also, when you consolidate IRAs, you'll cut back on the paperwork that you have to track, because you'll only receive one statement. And you pay no taxes or IRA penalties when you transfer from one IRA to another.
So, there you have it -- reasons to fund your IRA early and to consolidate your accounts. By taking these steps, you'll help get the most out of your IRA. And, as you build resources for retirement, you'll find that a well-managed IRA can be a tremendous asset.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com