A Suze Orman exclusive

Your Action Plan

If you have the money to fund both your Roth IRA to the max and a 401(k) plan to the max, that's great. I don't have a problem with that, but if you do not have that kind of cash lying around, I want you to suspend your 401(k) deductions once you max out on the employer match. That will boost your paycheck. Use every extra penny that shows up in your check to invest in a Roth IRA account you open up at a discount brokerage such as Ameritrade or a mutual fund company such as Vanguard. Then make sure you sign up for the 401(k) again in time to be eligible for the next year's employer match. Again if you have the flexibility to do both, go for it. But if money is tight you need to be tax smart: the 401(k) up to the employers match, and then the Roth.

Quick Investment Tip: In a 401(k) plan you are limited to only the investment choices that are offered to you in that plan by your employer, which usually consists of their stock and maybe a few mutual funds. In a Roth IRA opened at a discount brokerage firm or fund company the whole world of investments is opened up to you. You can buy individual bonds, rather than just bond funds. You can also buy Exchange Traded Funds (ETFs) rather than mutual funds. That can be big. You can also buy Certificates of Deposit (CDs), Real Estate Investment Trusts (REITs), and Treasury Bills, Notes and Bonds. That flexibility in choice is a big advantage.

Don't Sink Your Own Tax Boat

Okay, so many of you are reading this and saying, “Suze I know about Roth IRAs and I am just about to make a contribution for last year into my account so what are you telling me that I do not know?” Keep reading for if you are about to make a contribution this year for last year’s IRA, boy are you missing the boat.

There are literally millions of tax filers who will make their 2004 IRA contributions in the coming weeks, and that's perfectly kosher to do so since you have until April 15th of 2005 to make your 2004 contributions. But by waiting so long you are literally wasting tens of thousands of dollars by doing it this way. If you start making your IRA contribution early in the year (in this example, if you had started in January 2004) rather than waiting to the last minute, you are going to give your money all the more time to compound. If you were to invest $4,000 in January and you did that every January for the next 30 years while earning an average return of 8 percent a year, you would have about $489,000 at the end of the 30 years. However, if you invested the same $4,000 a year, but you did it at the end of the year, your investment would be worth about $453,000. Now think about this, you invested the exact same amount of money, you earned the exact same 8 percent, but by investing in January of each year rather than December, you have $36,000 more. That is a lot of money!

Now even if you don't have the $4,000 handy at the beginning of each year I want you to open a Roth IRA with an automatic investing plan; you can have $333 a month deducted from your savings or checking account and invested in your Roth in a good no load mutual fund. By the way, if you invested $333 every month starting in January rather than waiting till the end of the year in December and investing all $4,000 at once, over 30 years at an 8% average rate of return you would have about $46,000 more. You can't pass up this tip up—just start now.