Five reasons to contribute to an IRA today
The clock is ticking. Every year, you have until the tax filing deadline to take contribute to an IRA. Individual retirement accounts have tax planning benefits, and they quietly grow in the background to fund your retirement.
Here are the five reasons to capitalized on an IRA today:
One: The most successful investment strategies
IRA’s are designed for consistent growth over the long term. The real secret to their success is to contribute to an IRA with an automated transfer. Think about it, it takes a little work upfront to set up (weekly, monthly, etc) and then all that’s required is to review once a year.
It’s easy to get jammed by the argument about whether ‘this’ investment is better than ‘that’ investment. The reality is that best investment is the one you actually make.
Information overload and ‘paralysis by analysis’ are two very real things. People will spend so much time thinking about the best choice to make that they inevitably make no choice at all. This can lead to months and years of lost savings and compound interest.
Making a good investment today is much better than making a great investment sometime off in the undefined future.
With this method, it’s not unlike having a car payment. After the first few months the withdrawal becomes part of the norm. A few years down the road, Investors realize they’ve made significant growth (plus compound interest) towards their retirement while barely having to lift a finger.
The strategy of an automatic contribution to an IRA is something you can implement today. When (or if) you decide to expand your investment education, you can build on a successful track record of growth.
Automation is a simple strategy that’s extremely underrated.
Two: The best time to invest is….
You’ve heard the expression before: ‘When is the best time to plant an Oak Tree? Ten years ago. When is the second best time to plant an Oak Tree? Today’.
This old axiom is encouraging people to act now, and act for the long term.
The Oak tree will live through good seasons and bad seasons, but over the long term there is almost nothing that will throw it off track. Retirement investments are much the same way.
It’s a mistake to get caught up in the day to day fluctuations of the market. Using time to your advantage is one of the most surefire ways to beat market volatility.
In a given year or decade markets go up and down; however, over time, on average, the markets go up. In investing,there’s no such thing as a ‘sure thing.’ But investing in the market over a long period of time is about the closest thing to a ‘sure thing’ that the layman has access to.
Three: Advantages for the young
All taxpayers that are eligible can contribute to an IRA. Young adults can contribute $5,500 into a traditional or a Roth IRA (so long as they've earned at least that much in a year).
For young adults, saving made now (even small savings) gives them two main advantages over their older counterparts.
First, small investments now will beat large investments made ten years down the road when career (and cash flows) are more established. Why? Because of compound interest. Young adults often fear that their inexperience will hurt them in the long run. But the math uniformly favors those with many decades ahead of them.
Second, young investors can afford to be more aggressive. Or another way of looking at this is that young investors are more resilient to risk. Back to the Oak Tree example, young investors can simply wait out the down times in the market. In fact, investments made during a downtime in the market is can be looked at as getting an investment ‘on sale.’
Four: Advantages for the not-so-young
There are a few advantages for more mature investors:
First: Investors over 50 can contribute $6,500 per year to accelerate (or catch up) on retirement savings. For those in careers with 401(k) programs set up, you can utilize both to maximize pre-retirement savings (but be aware that when combining the two that there are limits to the amounts that can be used for a tax deduction).
Second: Non working spouses can also contribute to an IRA. As a side note, be aware that alimony payments count as earned income for the recipient.
Third: Roth IRA for working minors can be set up. This extends the benefit of time even further. Parents manage the investment for the children until they are old enough to transfer the account into their name. Parents can use this as an opportunity to show children how investments work in the real world.
Five: Tax Breaks
There are two basic types of IRAs: the traditional IRA and the ROTH IRA.
The contributions to a traditional IRA are eligible for a tax deduction in the year they are made. Earnings grow tax free, until the time they are required to begin being withdrawn at age 70 1/2. Funds are taxed at the time of withdrawal
With a Roth IRA, you make contributions with after-tax earnings. These are not eligible for a tax deduction in the year of the contribution. Earnings grow tax free; however, unlike the traditional IRA there are no mandatory withdrawals, and withdrawals are not subject to taxation.
Contributions of $5500 per year is available to everyone or $6500 for those 50 and older. The total contribution can be made of any combination of the two basic types.
.As an aside, the tax deduction available through a traditional IRA contribution becomes limited if you or your spouse already participate in a 401 (k). It is also limited as you move into a higher earnings bracket.
There’s not a single ‘right-or-wrong’ way to contribute across the two types. Really it comes down to whether you think the rate you will be taxed at will be higher now, or at the time of your withdrawal.
Traditional and Roth IRA’s are designed to benefit investors at all phases of their investing life. Regardless of your financial situation, they are a beneficial and flexible part of your retirement planning. Don’t delay, contribute to an IRA today..