When you invest in an IRA, your contributions and any earnings can compound over time while potentially growing tax deferred (in the case of a Roth IRA, your withdrawals may be completely federal tax free, provided they meet certain criteria). Since tax-deferred investing can help your money compound at an even faster rate than money in non-tax-advantaged investment vehicles, an IRA can be a good choice as you seek to build additional funds for retirement.
While it's generally a good idea to maximize your IRA contributions if you can, setting aside even a modest amount from each paycheck can make a significant difference over time. By contributing now, you can benefit from the power of tax-deferred compounding for a longer period of time. For the 2015 tax year, the maximum Traditional IRA or Roth IRA contribution is $5,500 ($6,500 if you’re age 50 or older).
This hypothetical illustration shows how three people — each under age 50 — end up with substantially different IRA accumulations, based on the amount of money they contribute each year. Gary contributes $2,000 per year to his IRA. Bill contributes $3,000 per year. And Diane makes the maximum contribution every year for those under age 50 ($5,500). As this chart shows, investing the maximum amount can add thousands of dollars to an IRA over a 30-year period.
1 This chart assumes a hypothetical interest rate of 6% with no withdrawals during the period indicated. This calculation does not reflect the deduction of any taxes, fees or expenses and is not intended to predict or project an investment rate. If taxes and expenses were included, the performance would be lower. Actual returns will vary.
2 This chart assumes that for those who are age 50 and under the maximum annual IRA contribution is $5,500 for 2015 and all subsequent years. These maximum contribution rates are based on current tax laws and are subject to change.
Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.
The tax information contained herein is not intended to be used, and cannot be used, by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. It was written to support the promotion of the products and services addressed herein. We do not provide tax or legal advice. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
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