Don't wait: Invest now in an IRA for 2007 tax year

On athe Money

Your Money

April 22, 2007|By Gail Marksjarvis | Gail Marksjarvis,Chciago Tribune

Millions of Americans filed their taxes last week, and many missed the opportunity to open an IRA and stash money away for retirement.

They may have flirted with the idea of funding an individual retirement account, and then discarded the idea as the countdown to file taxes pressured them into a tizzy. Others peered into their bank accounts and felt like Old Mother Hubbard looking into an empty cupboard.

Yet if you were among those who considered an IRA and then let the opportunity pass you by during tax time, you don't have to give up for the next 12 months.

In fact, you shouldn't.

People often think that the only time to open an IRA is during tax season, so they can reduce their taxable income to pay less to Uncle Sam.

But as of April 17, you merely missed the opportunity to open an IRA for the 2006 tax year. But you can go into action now, and put $4,000 into an IRA this week for the 2007 tax year. If you don't have $4,000, you can open an IRA and make small contributions throughout the year.

Why bother now? Because waiting to invest is your enemy. It cuts you off from the ability to turn small savings into a fortune later in life.

Imagine, for instance, that you open an IRA this week, and put the maximum allowable contribution into it - $4,000 for the 2007 tax year, or $5,000 if you are 50 or over. If you are 25, invest the money in a stock market mutual fund, and stocks act on average as they have during the last 80 years, your $4,000 would become about $181,000 if you retire at 65.

Yet, if you procrastinate, or second-guess yourself, and wait another year to start an IRA, your $4,000 would become only about $164,500. If you tell yourself you are young, and can wait for five years, your $4,000 would grow to $112,000.

And if you missed the power of youth, you should still go into action now.

At age 45, for example, your $4,000 would grow to just over $32,000 by retirement. But if you invest $4,000 every year until you retire, you would accumulate about $314,000.

The point is to start, and if you have started, to devote more money every year. If you have a 401(k) at work, use that too - especially if your employer matches your contributions. Get every matching cent you can get.

You don't need $4,000, or even $1,000, to start an IRA.

At some mutual fund companies, like T. Rowe Price, you can open an IRA with as little as $50, provided that you promise to add another $50 every month. Such a plan makes saving fairly painless. You can set up the account so the money moves directly from your checking account into your IRA every payday.

That way you won't get a chance to miss the money because it will leave your checking account before you know it's there.

You may see no urgency for an IRA if you are saving money in a savings account. But there is an urgency. With a savings account you are likely earning only about 2 percent a year on your money, and at tax time you are giving Uncle Sam some of the earnings.

With an IRA, you don't get taxed on your savings as long as they stay within the IRA. That makes a huge difference. In addition, if you invest at least some of your money in a mutual fund that invests in the stock market, you likely will earn more over many years than in a savings account.

Assume you are investing $600 this year - or the $50 a month some mutual fund companies accept as a minimum.

After 35 years in a savings account, you might have about $970. Yet, if you invest in a stock market mutual fund, and it climbs the way stocks have historically, you could average a 10 percent return a year on your money. Instead of having $970 after 35 years, you would have about $19,500.

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