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IRA is a power tool for retiring

Your money column

POSTED: April 28, 2007 5:04 a.m.
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 those pros. Why use taxable investments or low-interest savings accounts when you can plug into the power of an IRA?
IRAs 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.
And now, the maximum annual limit for traditional and Roth IRA contributions has increased to $4,000 for the years 2005 through 2007. If you are 50 or older, you can put in even more: an extra $500 in 2005, and $1,000 in 2006 and 2007.
There also will are special “catch up” contributions to IRAs for individuals 50 years and older.

Power of reinvestment
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, your 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 powerful!

Power of dollar cost
averaging
If your IRA is invested in stocks, you may be concerned about identifying the right time during the year to make your contribution. But instead of trying to time your investment, tap into the power of dollar cost averaging.
Dollar cost averaging 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.
IRAs are a powerful savings tool, and these time-tested strategies can give your IRA an extra power surge. Talk to your investment representative to learn how you can take advantage of dividend reinvestment and dollar cost averaging.

Cardella is a financial consultant with Edward Jones in Hinesville.
 

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