If you’re not funding an IRA (Individual Retirement Account), you may be short-changing yourself both now and in the future. A traditional IRA may help you save money on your taxes today and sock away tax-deferred investment savings for your retirement many years from now.

A traditional IRA is a retirement savings account that allows you to potentially reduce your taxes in the current tax year and build your retirement savings tax-deferred until you withdraw it after you retire.

When you contribute to a traditional IRA, every qualified IRA investment dollar you add to your account may reduce your taxable income by the same amount. If you contribute the maximum amount, which is $6,000 for those under 50 and $7,000 for 50 and over for 2019 and 2020, you may be able to reduce your taxable income by that same amount.¹

For example, if you’re in the 25% tax bracket, a $6,000 contribution could save you about $1,500 a year in taxes. If you’re in the 10% bracket, it could save you $600.

Note that your deduction may be limited due to your income and other factors, including your or your spouse’s ability to participate in an employer-sponsored retirement plan such as a 401(k). See details on deductions and contribution limits.

By contributing every year to your IRA, you may accumulate a substantial nest egg by the time you retire. For example, let’s say you contribute $6,000 a year to an IRA and invest the money in a mutual fund that earns an average annual return of 7%, which is roughly equivalent to the average annual return of 10-year U.S. Treasury bonds over the past 50 years.²

Keep in mind that investing involves risk, including the potential for loss of principal. These examples are hypothetical for illustrative purposes only and are not intended to represent the performance of any particular investment product, nor do they take into consideration any product expenses or fees.  The results would be reduced if those costs were included.

Based on 7% annual growth, with a $6,000 annual contribution (at $500 per month), here’s how much an IRA would grow over the next four decades:

After 10 years, the IRA would have grown to $86,542, after 20 years it would have grown to $260,463, after 30 years it would have grown to $609,986, and after 40 years it would have grown to over a million dollars at $1,312,407. (See graph below)

Investing as much as possible to your IRA may require some small sacrifices in the short-term, but over time, you should be able to reduce your current year’s taxes during your working years while building a tax-deferred retirement nest-egg for the long term.

¹ IRS.gov was the source for all IRA facts and conditions stated in this article.

² New York University