STOCKS HAVE PLACE IN RETIREMENT ACCOUNTS (FINANCIAL FOCUS)

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

If you have a Roth IRA, a traditional IRA, an employer-sponsored retirement plan or some other tax-deferred retirement vehicle, the chances are pretty good you're funding your plan either partially or entirely with mutual funds.

Mutual funds are good choices, because they offer diversification and professional management, but if your retirement account is made up solely of mutual funds, then you may be missing out on another good funding vehicle individual stocks.

You may already be buying stocks for your everyday investment account. How do you know what stocks might be good candidates for your retirement plan?

In general, you may want to put those stocks that pay higher dividends in you retirement account.

If you kept these stocks in your regular trading account, the dividends would incur taxes at your regular income tax rate, which could be as high as 39.6 percent. But if you put these stocks in your retirement account, the dividends will be allowed to compound on a tax-deferred basis.

Furthermore, stocks that pay higher dividends tend to be well-established companies with proven track records and solid long-term growth potential. Clearly, these are the traits you want in the investments that make up your retirement account.

Conversely, you may want to keep small-capitalization and aggressive growth stocks in your regular account. Many of these stocks pay little or no dividends, so you won't pay taxes on your shares until you sell them. Even then, you'll just be paying capital gains taxes, which are capped at 20 percent only about half the top income tax rate.

There's another reason you might want to keep the small capitalization and aggressive growth stocks out of your retirement account: volatility. These types of stocks are often susceptible to large price swings caused by market downturns. Over the long term, these periods of volatility do tend to smooth out, but when you're close to retirement, you don't want to take the chances of hitting a "down" cycle.

On the other hand, you don't want all the stocks in your retirement account to look exactly alike. Diversification is just as important in a retirement account -- in stocks, mutual funds or a combination of the two -- try to put away as much as you can afford, or as much as is allowed in your particular plan.

Remember that your contributions are all tax-deferred, which means that your money will grow much faster than if it were placed in similar-yielding investments in a taxable account.

And when it comes to saving for retirement, the faster your money grows, the better.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.