Many financial rules are in flux these days, as our government tries to deal with our wobbly economy. The latest big bailout plan has provisions to change the Alternative Minimum Tax rules, which save many taxpayers headaches and dollars. But IRA contribution limits are unchanged between 2008 and 2009. You can still contribute as much as $5,000 for the year if you qualify, and as much as $6,000 if you're 50 or older. (You do have an IRA, right? And you are contributing to it regularly, right? IRAs are powerful.)
However, limits have risen for contributions made to 401(k)s and other employer retirement plans, advancing from $15,500 in 2008 to $16,500 in 2009. That $1,000 jump might really be worth much more than that. Say you invest that extra $1,000 this year, and it earns an annual average of 10% over 20 years in your 401(k). In 2029, you'll end up with $6,700.
Better still, your whole $16,500 would grow to $111,000 -- just from one year's contribution! Granted, that's a hefty chunk of change, and not everyone will be able to swing it. But you should try to chip in as much as you can to your retirement accounts, as soon as you can, because your earliest dollars have the most time to grow. Note also that 401(k) contributions lower your taxable income. If you're making $75,000 and you contribute $16,500, your income instantly drops to $58,500.
While you're showing your 401(k) some love, you shouldn't ignore your IRA. It offers an extra benefit -- the ability to easily invest in all kinds of individual stocks, which can significantly outperform the market more easily than mutual funds. Some of the world's best-known corporations have earned great returns over the long haul.
|
Company |
20-year average annual return |
|---|---|
|
EMC (NYSE:EMC) |
27% |
|
Abbott Labs (NYSE:ABT) |
14% |
|
Sherwin-Williams (NYSE:SHW) |
14% |
|
PepsiCo (NYSE:PEP) |
13% |
|
Clorox (NYSE:CLX) |
12% |
|
Deere (NYSE:DE) |
11% |
|
Kroger (NYSE:KR) |
12% |
Data: Yahoo! Finance.
The list clearly shows how familiar names can serve us well. A $5,000 investment growing for 20 years at 14% will top $68,000 -- just from one year's contribution.
In these scary times, be sure to make the most of your 401(k). To set yourself up for an unpainful retirement, try our Rule Your Retirement newsletter service for free. You'll get full access to all past issues, along with recommendations of promising stocks and mutual funds.
