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It's Not Too Late

Posted on Monday, September 27, 2021 in Financial Education

Putting off, or not making a contribution to an IRA can be easy. There may be other uses for the funds that seem more urgent — a vacation, a down payment on a new car, new furniture or maybe just leaving the funds in a regular account to build some liquidity.

However, making that $6,000 contribution, and even making it now instead of next April, can make a large difference when you retire. Many of the benefits of IRAs are obvious — tax deferred earnings, potentially a tax deduction with a regular IRA, and the permanent tax-free nature of a Roth IRA.

Two of the not-so-obvious benefits should not be overlooked:

  • Making IRA contributions force you to save. Saving more automatically increases the amount you accumulate. Once this saving becomes a habit, you may not even notice you are doing it.
  • By contributing early and often, your IRA balance has the opportunity to grow even more.

The impact of missing one IRA contribution

The tax deferred compounding within an IRA allows your money to grow faster since you do not have to pay any taxes while the funds are in the IRA. Roth IRAs provide an even better result since qualified distributions are not subject to tax. Consider what missing just one $6,000 contribution can mean. Of course, what you earn on your IRA is unknown and, if it is a regular IRA, your tax bracket when you take funds out is unknown, but the cost of delaying just one year can be significant.

Everyone's situation is different, there are no guarantees on what you can earn on funds within an IRA and your tax situation may suggest that consulting a qualified tax professional is advisable. Also, the current tax laws provide for the ability to make additional contributions beginning at age 50. For those ages 50 and above, you can contribute an additional $1,000 annually, or a total of $7,000.

The cost of delaying just one year to start contributing to your IRA can be quite significant. Take advantage of the tax deferred compounding within the IRA and the higher limits to prepare for a financially secure retirement. Contact your financial institution or financial advisor for more information.

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