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Time-Maximizing Financial Practices

Time is a valuable resource for people of all ages for developing and maintaining economic security. Financial well-being is improved the more years that people save, the longer their money remains invested (to ride out market downturns), the more frequently money doubles in value, and the faster that debt is repaid.

Below is a brief description of financial practices that maximize the resource of time:

• Dollar-Cost Averaging: This means investing regular amounts (e.g., $50) at regular intervals (e.g., monthly) regardless of whether securities markets are moving up or down. This practice reduces average share costs as investors acquire more shares when prices are down and fewer shares when prices are higher. It is also affordable because you make deposits as you are paid.


• Tax-Deferred Investing: Tax-deferred investments "buy an investor time" because taxes on investment earnings are postponed until a future date, usually following retirement. After 10 or 20 years, the gap between the value of taxable and tax-deferred accounts widens considerably because tax-deferred investments are made with before-tax dollars. Examples of tax-deferred accounts are Individual Retirement Accounts (IRAs) and employer retirement savings plans such as 401(k)s and 403(b)s.


• Roth IRA Conversions: Once a Traditional IRA is converted to a Roth IRA, it not only grows tax-deferred, but withdrawals become tax-free if the owner is over 59.5 and has held the account at least five years. In addition, Roth IRAs are not subject to required minimum distributions beginning at age 70.5. However, taxes are owed on converted amounts during the year a conversion is made. You're more likely to recoup this cost if Roth IRAs are invested for 10 to 20 years or more. A helpful resource for Roth IRA decisions is the Web site www.rothira.com.


• Tax-Efficient Asset Withdrawals: A retiree's money lasts longer when assets are withdrawn from retirement accounts in a tax-efficient manner. Generally, this means tapping taxable accounts and tax-free investments (e.g., municipal bonds) first and waiting until age 70.5 to tap tax-deferred accounts so that they continue to grow through compound interest.


• Long Term Capital Gains: When investors sell securities at a profit, capital gains tax is due. Investments held for a year or less are taxed at ordinary income tax rates (10% to 38.6% in 2002-03). Those held more than a year are taxed at favorable long-term capital gains rates.


• "Stretch IRAs": This term refers to the effect of recent IRS final regulations on distributions from retirement plans and means that named beneficiaries of tax-deferred plans can make withdrawals according to their own life expectancies. The result is the option to take smaller annual distributions, pay less in taxes, and lengthen the lives of tax-deferred accounts.


• PowerPay Debt Reduction Analyses: Rutgers Cooperative Extension offices provide PowerPay computer analyses, which create a schedule to apply payments from paid off creditors to remaining debts, thereby saving repayment time and interest. For example, let's assume that someone owes money to seven creditors, had been making a $50 monthly payment to Sears, and that debt is repaid. That $50 is applied to debt owed to the remaining six creditors, usually starting with the highest interest debt first. For further information, about PowerPay, visit www.rce.rutgers.edu/money2000 and click on the "Resources" section or call 973-579-0985.