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5 Ways It Pays to Fund Your IRA

By Chris Warren

  • PUBLISHED August 07
  • |
  • 3 MINUTE READ

Though many people fret about how they’ll be able to afford retirement, a recent survey found that less than a third of Americans take advantage of one of the most powerful financial tools available for retirement planning: the individual retirement account, or IRA.

But this simple step can go a long way toward preparing for life after work. Here are five reasons that funding your IRA is a savvy move.

1

Longer retirements cost more. With Americans living longer, the amount of money required to fund retirement is significant. AARP estimates that it takes more than $1.1 million to support an annual income of $40,000 over the course of a 30-year retirement. That’s one reason it’s important to begin funding your IRA early enough to harness the power of compound interest.

2

Tax savings. Everybody wants to keep more of the money they earn. Funding a traditional IRA is one way to do that, because contributions are typically tax-deductible (check with your tax professional to be sure yours will be). For example, if you make the IRS-maximum IRA contribution of $6,000 and you’re in the 35% tax bracket, you could save nearly $2,000 on your annual tax bill. For people over 50, that maximum contribution goes up to $7,000, which could save you even more. You may want to consider high yield IRA certificates of deposit and money market accounts to get the most out of your retirement planning.

3

Lower taxes in retirement. While traditional IRAs provide tax benefits today, Roth IRAs let you keep more of your retirement savings. Because contributions to traditional IRAs are tax-deductible, the IRS taxes the withdrawals you make in retirement. By contrast, contributions to Roth IRAs are not tax-deductible, but withdrawals in retirement are tax-free. Keep in mind that if your income exceeds $137,000 (or $202,999 for a couple filing jointly), you may not be eligible to contribute to these plans. But if you are, then high yield IRA certificates of deposit and money market accounts may be worth considering. 

4

Flexibility in the here and now. Another benefit to having a well-funded Roth IRA is that your contributions can be withdrawn at any time without triggering taxes and penalties—something that is not true for traditional IRAs. In addition, if you’ve had a Roth IRA open for at least five years, you can withdraw contributions, as well as earnings of up to $10,000, if you use it to purchase your first home. 

5

Investment flexibility. A common complaint employees have about 401(k) plans offered through their employers is that these plans limit investment options. IRAs, however, offer great flexibility. Conservative investors can select IRAs that consist of FDIC-insured savings options, such as money market accounts, high yield savings accounts or CDs, while more aggressive investors can go with IRAs full of stocks in high-growth industries. There are also options for all stripes of investors in between.

Chris Warren is a former editor at Los Angeles magazine whose writing has appeared in publications including the Los Angeles Times, Institutional Investor and National Geographic Traveler.

Learn more about getting your finances in order as you get older.