RETIREMENT PLANNING
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 2020 and 2021, 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
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
The information provided is not intended as a source for tax, legal or accounting advice. Please consult with a legal and/or tax professional for specific information regarding your individual situation.
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