Back to How an IRA Can Help

When you invest in an IRA, your contributions and any earnings 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 savings 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 for helping you 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 2013 tax year, the maximum Traditional IRA or Roth IRA contribution is $5,500 ($6,500 if you’re age 50 or older). This an increase from the 2012 contribution limits of $5,000 ($6,000 if you’re age 50 or older).

IRA Contribution Chart

This chart 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.

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