The best way to make a good thing better is to give you more of it.
That's exactly what IRA investors who are age 50 or older get in their IRAs. While most people are limited to $5,000 in annual contributions, you become eligible to make catch-up contributions of an additional $1,000 as soon as you turn 50. The catch-up contribution rules apply both to traditional IRAs and to Roth IRA accounts.
What will 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 2049.
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 $5,000 per year, chances are that you have a solid plan for what to do with that money. 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, all three recommended model portfolios from our Rule Your Retirement newsletter include large-cap value funds, which typically include shares of well-known blue-chips like Disney (NYSE:DIS), Pfizer (NYSE:PFE), and ExxonMobil (NYSE:XOM). Also, consider putting a small part of your portfolio into small-cap stocks like Myriad Genetics (NASDAQ:MYGN) and Perot Systems (NYSE:PER).
Doing some bargain-hunting in a down market is another idea -- but be careful. Real estate investment trusts have gotten hammered over the last year, but REITs like Simon Property Group (NYSE:SPG) and Starwood Hotels & Resorts (NYSE:HOT) may not have hit bottom yet given the iffy economy. While some are finally looking for a housing market recovery, that may not translate to stronger commercial and other real estate performance.
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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