There is still time left to contribute to 2011 Traditional and Roth IRAs. You have until you file your 2011 taxes to make that contribution. Federal taxes for 2011 will be due on April 17, 2012, so this is the deadline for establishing your 2011 IRA. If you file for an extension, your IRA deadline will not be extended, so ensure you don’t miss the contribution deadline.

The contribution limit for 2012 IRAs is not increasing. Like 2011, you can contribute up to $5,000 total between Traditional and Roth IRAs. Taxpayers over the age of 50 can make an additional contribution of $1,000 between both types of IRAs for a total of $6,000.

Contributions to a Traditional IRA are tax deductible, but depending on your income and employment situation, the amount that can be deducted from your income varies. In 2012, for those who are covered by a retirement plan at work, single taxpayers or heads of household can deduct the full amount of their contribution if their modified adjusted gross income is up to $58,000. Between that amount and $68,000, taxpayers can take a partial deduction. At $68,000, the deduction is completely phased out.

Married taxpayers filing jointly (and qualified widows and widowers) can take the full deduction up to a modified adjusted gross income to to $90,000. The deduction phases out through $110,000. Married individuals filing separately can only take a partial deduction up to $10,000 in income.

If you are not covered by a retirement plan at work, the limits are more favorable. Single taxpayers, heads of households, and qualifying widows and widowers can deduct their full Traditional IRA contribution, regardless of income. Married taxpayers filing jointly can also deduct their full contribution unless their spouse is covered by a retirement plan at work. If that is the case, with a modified adjusted gross income of $173,000, the deduction phases out until the taxpayers reach an income of $183,000.

Taxpayers who are married by file separately can take a partial deduction through a modified adjusted gross income of $10,000, at which point the deduction is completely phased out.

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Discount brokers are everywhere. Not long ago, only a few companies offered the ability to trade stocks with low commissions. If you wanted to trade with a full-service brokerage, it might have cost $30 for each transaction. For this fee, you would talk with a broker assigned to your account, who would help you make trading decisions. Of course, the transaction fee and the promise of earning money encouraged these full-service brokers to suggest trading as much as possible.

Companies soon realized that they could offer a self-service model of stock investing, reducing overhead costs by eliminating the human broker, and passing that savings onto investors through reduced trading fees. In order to keep the volume of trades high, some discount brokers offer incentives to encourage more buying and selling.

SmartMoney recently looked into a number of discount brokers in detail in order to determine the best among a variety of categories:

For our 18th annual ranking of brokers — itself top-ranked by the Web site ConsumerSearch — we scrutinized a wide range of factors, from trading commissions and account fees to the cost of certain banking services and margin rates. In addition to parsing survey responses from the brokerages, we consulted with research firms and put brokers through our usual litany of customer-service tests.

Here is SmartMoney’s top ten discount brokers:

Others just missing the top ten include OptionsXpress, Zecco, and my current preferred discount broker, ShareBuilder. Who is your favorite discount broker?

See more details at SmartMoney.

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Is dollar-cost averaging (DCA) a sound investing strategy?

In theory, dollar-cost averaging allows you to invest smaller portions of your money over a longer period of time, reducing the chance that you pay a price too high for any individual investment. If your ideal allocation calls for $50,000 to be invested in the stock market through an index fund like VTSMX, rather than buying $50,000 worth of the fund in one day in a lump sum, dollar-cost averaging spreads that purchase in equal amounts out over days, weeks, months, or even years to reduce your exposure to daily fluctuations of the market. By investing the same dollar amount each time, you buy more shares when the price is lower and fewer shares when the price is higher.

In other words, if you buy $50,000 of VTSMX on January 1 and the stock market crashes on January 2 without recovering for six months, you might kick yourself for not having the cash available to buy when the price of the fund was more favorable in the months your investment on January 1.

Many brokers allow you to dollar-cost average or invest in a lump sum. Here are a few current special offers.

• Recommended: ShareBuilder offers a $25 bonus
• Recommended: Scottrade offers $7 trades
• OptionsHouse offers 100 free trades
• E*TRADE offers 100 free trades
• Zecco offers 10 free stock trades

The only good reason for dollar-cost averaging is you may not have that $50,000 ready at one time. If you rely on investing only from money left over from your paycheck every two weeks, you don’t have a lump sum available. Those who do have funds available might have already missed out by not investing earlier.

Investing in the stock market as soon as possible with whatever money you have available, in order to form your ideal asset allocation, beats dollar-cost averaging in the long run. Dollar-cost averaging would leave your ideal allocation unfulfilled by leaving a larger percentage of your total assets in cash, uninvested.

Overall, the stock market trends upward, even at the company level if that company is healthy. If you buy individual stocks of a healthy company, the price should move in an upward trend over the long term. Dollar-cost averaging will never be able to make up lost ground compared to investing an available lump sum because you will, on average, dollar-cost average your way into higher prices.

While there may be exceptions when looking at your investment performance in the short term, especially in an environment where stocks are stagnant or declining, but as a long term investing strategy, dollar-cost averaging fails. Small instances of luck will eventually give way to major trends. So far, almost every experiment I’ve personally attempted has shown that I cannot reliably time the market as well as I want to. I almost always would have done better by just investing as soon as possible rather than sitting with cash.

Psychologically, however, dollar-cost average has a more important role. Spreading out the short-term exposure to any specific day’s stock price can make an investment in the stock market feel less risky. If you’d otherwise be concerned about your investments that might fall 1%, 5%, 10%, or more in one day, dollar-cost averaging can help allay those fears. If you have those fears, you may want to reassess whether you’re comfortable with the risk of the stock market in the first place.

Here are some links for thought:

• The Wrong Reason to Dollar-Cost Average
• Do Not Dollar-Cost-Average for More than Twelve Months
• The costly myth of dollar-cost averaging
• Nobody gains from dollar cost averaging analytical, numerical and empirical results

Please share your dollar-cost averaging experiences, concerns, and thoughts.

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