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Getting an IRA today will pay off tomorrow

You may have to pinch a few pennies to get an IRA, but it's still the best way to prepare for retirement. TODAY financial expert Jean Chatzky offers tips on how to do it.
/ Source: TODAY contributor

Since the government places a limit on the amount you can deposit into an IRA (Individual Retirement Account) each year, it pays to hit the mark because you can't make it up later.

The max amount for 2007 was $4,000 ($5,000 if you're 50 or older). Don't have an IRA, or even know what one is? You're not alone.

According to a recent study of 1,200 investors by the folks at AARP Financial, only 39 percent of those surveyed have an IRA, and 44 percent don't understand how they work.

That needs to change, because investing through an IRA can be a huge contributor to a comfortable retirement — more so today, when Social Security seems rocky and defined-benefit pension plans pale in comparison to money you contribute yourself.

The good news is, it's not too late to open an account and deposit even a little something for 2007. If you already have an account, scrape together any extra pennies that will get you closer to that target of $4,000, and then aim to hit it next year, when the limit jumps by $1,000.

Here's your plan of attack:Know what you’re getting intoJudging by those AARP Financial results, it's time for a little lesson. An IRA account goes hand in hand with employer-sponsored defined contribution plans like the 401(k) or 403(b). If your employer provides matching dollars, you want to first max out your ability to grab that match. Then you can choose between continuing to fund your 401(k) or putting money into an IRA.Several varietiesThere are a few types of retirement accounts available, and if you're eligible, a Roth is likely going to be your best bet. The main difference? Contributions to a traditional IRA are tax-deductible, but you have to pay taxes on withdrawals down the line. Funds from a Roth IRA can be withdrawn tax-free and used to foot the bill for a house or education, in addition to your retirement."Taxes are at the lowest rates you'll ever see. Pay now while they're on sale, and then that money will be tax-free forever," says Ed Slott, a CPA who runs the Web site Income restrictions are the one caveat — you can only contribute to a Roth IRA if you make less than $95,000 individually or $150,000 combined with your spouse. Otherwise, you'll need to go with a traditional, which is still a valuable tool. Do what you can
What if you can't scrape together enough for a full contribution? It's an impossible request for a lot of people, particularly in this economy, so remember that something, no matter what it is, is better than nothing. "A lot of little actions over the long haul can really add up to getting you better prepared for retirement," says Mac Hisey, chief investment officer and treasurer of AARP Financial. If you have an extra 20 you can throw in there, that's great. Maybe you'll have another one next week and can add that in as well. If you filed your taxes early and have already received your return, an IRA contribution is one of the best ways to put it to use. Every little bit helps. Use time to your advantage
The best way to prevent the last-minute penny scramble is by making planned contributions throughout the year. That way, it becomes a habit, and by the time April 15, 2009, rolls around, you can breathe a sign of relief that you've already met the mark. Most accounts will allow you to set up automatic investments so that a designated amount will be transferred from your checking account to your IRA each month. This way, it's out of your mind. You can adjust your budget accordingly, and any danger of spending the money before you have a chance to invest it is minimized.

Looking forward, the max amount for 2008 is $5,000, which means about $400 a month will put you on par to reach your goal. If you're over 50, you'll have to shoot for closer to $500 a month to hit your target, which is $1,000 more. Consistently squirreling away little chunks of money is the best way to get there.

Let it rideOnce you deposit the money, move it into a portfolio that's well-allocated depending upon your age, your risk tolerance and your other investments. (Or, if you aren't sure how to fix your mix, put it into a target-date retirement fund or life-cycle fund that will rebalance itself toward your retirement date.) Then, let it ride.  I admit, it can be scary to start investing in the current market — every time you turn on the television or open a paper, you hear about the markets taking another record dive, or the Federal Reserve cutting interest rates yet again. But successful investors get in the market and stay there for the long haul, because historically these dips are always countered by a rise down the line.

"We're very big on counseling people not to react to short-term market fluctuations," says Hisey. "People should revisit and rebalance their asset allocation on some periodic basis." When you're young, you want to invest more aggressively, and that means heavy on the stocks, light on the bonds. As you get older, shift that balance a little so you're taking a safer approach with more bonds and fewer stock-based investments.

Jean Chatzky is an editor-at-large at Money magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s “Today” show and is also a columnist for “Life” magazine. She is the author of four books, including “Pay It Down! From Debt to Wealth on $10 a Day” (Portfolio, 2004). To find out more, visit her Web site, .