Don’t Miss the Tax and Savings Benefits of an IRA

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 $5,500 for those under 50 and $6,500 for those 50 and over for the current tax years, you may be able to reduce your taxable income by that same $5,500.¹  

For example, if you’re in the 25% tax bracket, which is the average all-in tax rate for single wage-earners,² a $5,500 contribution could save you about $1,375 a year in taxes.

Note that your deduction may be limited due to your income and other factors. 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 $5,500 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.³

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 costs were included. 

Based on 7% annual growth, with a $5,500 annual contribution, here’s how much an IRA would grow over the next four decades: 

After 10 years, the IRA would have grown to $81,310, after 20 years it would have grown to $241,258, after 30 years it would have grown to $555,902, and after 40 years it would have grown to over a million dollars at $1,174,853. (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.