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Pullback creates a decent buying opportunity

    Corporate America is beginning to try the patience of some investors. Last week the three major market averages retreated between 2% and 3%. The market struggled to digest unexpected news from a few pharmaceutical companies that are dealing with patient expirations and slim near-term new product pipelines. Short-term traders continued to sell while longer-term investors started to buy, sensing attractive valuations. The market will require patience as we move ahead into 2002 and 2003. The big question is whether 11 interest rate cuts, lower oil prices, and lots of liquidity in the banking system will be enough to boost profits to meet, then exceed the 2002 earnings expectations.

    Over long periods of time, the stock market tends to reflect real growth in consumer spending. Expectations regarding economic growth remain on investor’s minds. There are continued signs of some improvement in some of the more important indices that track economic growth. There is anecdotal evidence that companies operating in the tech sector have seen order rates stabilizing. Inventories continue to decrease, retail sales were not as bad as predicted, and housing and auto sales continue to be strong; these signs were not evident three months ago.

    The recent pullback in the stock market creates a decent buying opportunity for investors with a disciplined long-term approach; possibly averaging in commitments over a several month period of time, using market pullbacks as a catalyst for purchases. 

    As people consider stock market investments remember the end of the year is close at hand. Retirement planning should include the consideration of a Roth IRA. Until a few years ago, about 90% of Americans eligible to set up tax deductible IRAs did not contribute to one. But the Taxpayer Relief Act of 1997 created a type of IRA that has since become one of the most popular retirement planning vehicles available today. It's called the Roth IRA.

    The Roth IRA allows you to accumulate and withdraw earnings tax-free, provided earnings in the account remain there for at least 5 years and are distributed after you attain age 59½.

    You can make a penalty-free and tax-free withdrawal of up to $10,000 for a first-time home purchase before age 59½. You can make penalty-free withdrawals for qualifying college costs before age 59½, but income taxes are due on that withdrawal. Other withdrawals are generally subject to a 10% penalty tax.

    With a Roth IRA, you do not have to begin taking distributions when you attain age 70½, as you would with a traditional IRA. And you can continue to make contributions after reaching that age. This makes the Roth IRA a powerful estate planning tool because it enables you to continue using your retirement plan to increase the value of your estate as you age and, therefore, have more money to pass on to your beneficiaries.

    You are eligible to make a full or partial contribution to a Roth IRA if your annual Adjusted Gross Income is less than $110,000 ($160,000 if you file jointly with your spouse).

    Contribute early; financial planning professionals generally recommend that you put money into a Roth IRA as early as possible each year. Reason: The sooner you put your assets to work in a Roth IRA, the longer they will have time to grow tax-free.

    How much faster can assets grow when free from taxation? Consider this:

    If you invested $2,000 annually for 30 years, your account would grow to $244,692, assuming an 8% annual return. However, if you invested the same amount in a taxable account and earned the same annual return, your account would only grow to $160,326, assuming a 28% tax bracket.

    Before investing in any IRA, consult with your personal tax advisors about the specific tax consequences and advantages for your situation.

Nancy Hadley is an investment specialist with D.A. Davidson in Sandpoint.

 

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Nancy Hadley

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