Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Late start for retirement savings

Dear Dr. Don,
I am in desperate need of advice. I am a 53-year-old female with no retirement investments or any savings. That's right -- nothing.

My husband is disabled and is already receiving Social Security benefits. My question is; "Where do I even start?" I don't have a clue where to turn to try and set up some kind of financial security for later. My job has no 401(k) plan or any retirement savings program, so it is up to me to put a plan in place.
Thanks,
Judy Jumpstart

Dear Judy,
The easiest place to start is with an IRA or Roth IRA account. These accounts were designed for people who don't have other types of retirement plans available to them. Changes in the tax code last year increased annual contribution limits, and there are some catch-up provisions that will allow you as a 53-year-old to contribute even more.

IRS Publication 590, Individual Retirement Arrangements, discusses the contribution limits. The limit is $3,000 per year plus an additional $500 for individuals over 50 years of age.

Married and filing jointly you may be able to contribute twice that amount or up to $7,000 if you meet income eligibility requirements even though your husband's Social Security benefits don't count as eligible compensation in establishing the contribution limits. If you're confused about what you can contribute, you should get professional tax advice.

Choosing between a Roth IRA and a traditional IRA is a bit perplexing. If you think that you'll be in the same or higher tax bracket in retirement than you are now, then a Roth IRA can be a better choice. That's because Roth IRA contributions are made with after-tax dollars, but qualified distributions out of the account are tax-free. There is also an initial five-year period before investment earnings can be withdrawn tax-free as qualified distributions.

With a traditional IRA your contributions can be made with pretax dollars, and qualified distributions are taxable at your ordinary income tax rate. If you expect your federal income tax bracket to be lower in retirement, then a traditional IRA may be better than a Roth IRA.

You can open a Roth IRA or traditional IRA account with a brokerage firm, your financial institution or directly with a mutual fund company.

I think a no-load, domestic hybrid mutual fund is a good place for you to start investing. A hybrid fund invests in both bonds and stocks; a no-load fund doesn't charge a sales commission (load).

Search for mutual funds with low annual expenses, experienced managers and an investment approach that matches your goals. Morningstar has a fund selector tool that will help you put together your shopping list.

-- Posted: June 11, 2002