You've probably just stopped accidentally writing "2006" on your checks, and now I'm going to really confuse things for you. That's because you may have some unfinished business from last year that needs your attention.
If you want to retire (and I'll bet you do), you still have two-and-a-half months to make IRA contributions that will count for 2006. This is one of those few times in life when deadlines can actually work for you.
Tax laws allow you to make contributions to an individual retirement account until that year's tax return is due. This year, you have until April 17 to make your 2006 IRA deposits, which gives you an extra weekend to dig through the couch cushions for loose change.
If you did not make the maximum $4,000 contribution to your IRA last year, it's time to start scrounging for some cash. By taking advantage of the longer deadline, you can get as close as possible to packing the maximum $8,000 allowed into your IRA for last year and this year.
What can $8,000 do for you? Let's say you're 35 years old, and you put away $8,000 by the end of this year. Historically, the stock market has rewarded investors with an average annual return of 10%. If that record keeps up, you'll have $139,595 for retirement at age 65. Equity index mutual funds make it easy to tap the average gains of the market.
What this example illustrates is the wonderful compounding power of time. So don't let that $8,000 figure discourage you if it's impossible for you to reach that goal. Just deposit everything you can on behalf of your 2006 contribution. Then, get started on 2007.
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That's the beauty of investing for your retirement in an IRA. Its flexibility means you can invest in just about anything you want. So you can keep it simple with a few index funds, or you can explore the endless world of stock-picking.
But, that may be getting ahead of ourselves. First, you have to make sure you've got an IRA set up and you've deposited some money in the account. If you don't have an IRA, you can still open one and make contributions for last year. If you have one and you're wondering where to get the extra cash, consider:
- Cutting the budget for February and March. You can sacrifice a little bit for two months to make sure you don't have to spend your retirement clipping coupons.
- Depositing any cash you got for the holidays. Factor in the compounded earnings, and your $25 check from Aunt Marge looks downright generous.
- Dipping into your savings. Don't drain any money you're keeping for an emergency, unless you have a really healthy emergency account and you're confident you can fill it back up quickly. Do scrutinize your checking and savings accounts, and see how much you can permanently put away into your IRA.
Once you've done everything you can for 2006, it's time to think about 2007. You can avoid the last-minute crunch next year by having money directly deposited to your IRA before you're even tempted to spend it. Make 2007 the year you follow the old but sage advice to pay yourself first.
If you're new to IRAs and want some help figuring out which might be best for you, take a look at the Fool's IRA Center.
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