IRA’s have been around for decades. Are you taking advantage of this wonderful tax-saving strategy? If not, here are three great reasons to contribute to your IRA this year and every year.
1. If you make qualified contributions to a traditional IRA, those contributions are tax-deductible. Let’s assume you make a contribution of $5,500. Let’s also assume that you are in the 30% tax bracket (federal tax of 25% plus state tax of 5%). So a $5,000 contribution reduces your tax bill by $1,650. You’ve just put away $5,000 for your retirement and the government gives you $1,650 back, so your actual out-of-pocket cost is only $3,850. How sweet is that?
Of course, you can also choose to put the $5,500 into a Roth IRA. In that case, your contribution is not tax deductible, so you realize no current tax savings. Instead, provided you meet the Roth IRA conditions, your contributions are tax-free when you withdraw them, and so you get tax savings during retirement rather than during your working years.
Either way, the IRA is a great way to reduce your taxes. The only question you must answer is “When do I want to receive the tax benefit? Now or later?”
Also take note that if you are age 50 or older, the maximum IRA contribution for 2015 (traditional or Roth) is $6,500 instead of $5,500. So the tax benefits are even greater for those old enough to take advantage of them.
2. Your contributions grow tax-free as long as they remain in the account. Through the miracle of compound interest, this allows your money to grow faster than if it was in a taxable account. Again, with a traditional IRA, the growth of your contributions will be taxed upon withdrawal; so there’s a sense in which traditional IRA contributions are only tax-deferred, not tax-free. But with a Roth IRA, you do get true tax-free income upon withdrawal.
3. You are exercising the self-discipline of a forced long-term savings plan. Some call it “retirement planning”. Others call is “paying yourself first.” I call it common sense. Millions of Americans foolishly live beyond their means and must pay for current expenses with debt – and in many cases, lots of debt. Others may not live beyond their means, but they do spend every dime they make on their current lifestyle (also foolishly), with no thought whatsoever of their later years, when they will be unwilling or unable to work.
Are you counting on Social Security benefits to be enough to support you current standard of living in retirement? I hope not. Do yourself (and your family) a big favor and stop spoiling yourself now with frivolous spending – using money you don’t have to buy things you don’t need to impress people you don’t even know (as well as a few that you do know).
So please don’t use the excuse “But I don’t make enough money to contribute to an IRA” (or some other type of retirement plan). If that’s your belief, please consider the possibility that you are living beyond your means and need to learn how to spend less, be content with less, and live for tomorrow instead of today.