How an IRA Can Help
Why should you save for retirement?
With uncertainty over the future of Social Security and life expectancies increasing, many people will find they need to supplement their pensions with additional savings. So depending on the amount of your retirement accumulations, your personal savings may play an increasingly important role in how well you live in retirement. In fact, you may need anywhere between 70% to 85% or more of your pre-retirement income just to maintain your current lifestyle in retirement.
How an IRA can help
When you invest in an IRA, your contributions and earnings compound over time while 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.
The power of compounded savings
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 2011 and 2012 tax years, the maximum Traditional IRA or Roth IRA contribution is $5,000 ($6,000 if you're age 50 or older).
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 ($5,000). 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 fees or expenses and is not intended to predict or project an investment rate. If 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 $5,000 for 2010 and all subsequent years. These maximum contribution rates are based on current tax laws and are subject to change.
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. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
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