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July 30, 2007

Contribute to an IRA - A Building Block for Retirement

Posted in: Retirement Investing

Why contribute to an IRA?  Because the government has allowed us to contribute on a tax deferred or tax free basis to our retirement.  Anyone who is risk averse (wants to maximize return without giving up too much risk) should be involved in some type of IRA.  There are two types of IRA s, the Traditional IRA, and the Roth IRA.  In this post, I am going to show you my approach to IRA s, as well as showing you how I shop for funds within my IRA.  The contribution limits for both the Traditional IRA and the Roth IRA are as follows:

IRA Contribution Limitations
Year Age 49 & Below Age 50+
2002 – 2004 $3,000 $3,500
2005 – 2007 $4,000 $4,500
2008 - ? $5,000 $6,000

The tax advantages provided by IRA s make them a tool that should be used by all working families.  I prefer to invest in real estate for the greater gains, but for a time before my employer began contributing on my behalf, I utilized the company’s 403b (similar to 401k) program and was able to gain a presence in the stock and bond market while simultaneously reducing my taxable earnings per year (our 403b program uses a Traditional IRA funded with pre-tax dollars, thus allowing for a tax savings today).  The program is managed by Vanguard, which is an excellent, low cost, high benefit management company that is proven in the retirement fund management market.  I highly recommend them, if you don’t already have a management company, or want to roll over your current money to a higher quality management company.

Just a short excerpt on how I allocate my funds with Vanguard.  I stick mostly to the domestic market - about 95% of my money is here at home, and 5% is in a foreign/global fund.  When shopping for funds, I generally place the most importance on two things:

  • Life of the fund (How long has it been around?)
  • Average return since fund inception

I like to see funds that have been around at least 4-5 years if not longer, and of course, have the highest average return since inception.  Don’t be fooled by a new fund that has gained 35% in its first year, as this is not necessarily an indication of future earnings.  The down and dirty of how I go about researching funds, I will leave to another post…stay tuned.

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