The best way to make a good thing better is to give you more of it.
That's exactly what IRA investors will get in 2008. Starting this year, the annual contribution limit rises from $4,000 to $5,000. Those over 50 will still be eligible to make catch-up contributions of an extra $1,000. The new limits apply both to traditional IRAs and to Roth IRA accounts.
What'll it get me?
An extra $1,000 a year may not sound like it's worth the trouble. But over time, that money adds up. Simply by adding an extra $83 per month to your IRA and getting a 10% return on your investment, you'll boost your retirement nest egg by $10,000 after just seven years. You'll reach $100,000 in a little more than 24 years. And if you're young and start early, that extra money will mean $500,000 extra for your retirement by 2047.
If you use a Roth IRA, you won't have to pay any taxes on that money. Conversely, with a traditional IRA, you can deduct that extra $1,000 each year on your tax return. Whichever way you go, it's a winning strategy.
What should I do with it?
Once you decide to go ahead and set some extra money aside, the next question is how to invest it. If you've already been contributing $4,000 per year, chances are that you have a solid plan for what to do with that. And if you just want to put the extra thousand in the same stocks or funds, there's nothing wrong with that.
But another option you have is to take the opportunity to diversify with your $1,000. For instance, one recommended portfolio from our Rule Your Retirement newsletter includes small-cap value funds, which typically include shares of up-and-coming companies like Fairfax Financial (NYSE: FFH ) and Markel (NYSE: MKL ) . You could also consider putting a small part of your portfolio toward commodities stocks such as Arch Coal (NYSE: ACI ) and Deere & Co. (NYSE: DE ) .
Doing a little bargain-hunting in a down market is another idea. Real estate investment trusts have gotten hammered over the last year, but REITs Simon Property Group (NYSE: SPG ) and Starwood Hotels & Resorts (NYSE: HOT ) both jumped more than 8% yesterday. While the housing market may not be on sure footing yet, banks and other financial stocks are starting to get the support they need, which may help put a floor under their stock prices.
No matter what investments you choose, taking advantage of higher contribution limits by saving more in your IRA is a smart move. Even though the extra $1,000 may not sound like much, over time it can add up to a whole lot more savings for you to enjoy in your retirement.
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