A traditional IRA could help you reduce your current year’s taxes while building retirement savings for the future.
A traditional IRA (Individual Retirement Account) is a retirement savings account that allows you to potentially reduce your taxes in the current tax year while building your retirement savings tax-deferred. If you’re not currently funding an IRA, you may be short-changing yourself both now and in the future.
Tax savings add up
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 each year, which is $6,000 for an individual under 50 and $7,000 for people 50 and over in 2022 and $6,500 for under 50 and $7,000 for 50 and over in 2023, you may be able to reduce your taxable income by that same amount.
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 about $600.
Note that your deduction may be limited due to your income and other factors such as 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.
Build retirement savings
By contributing to your IRA each year, 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%.
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.
