Living paycheck to paycheck in the midst of ongoing inflation can make it challenging to prioritize contributions to an Individual Retirement Account (IRA). However, for those in a more stable financial position, allocating funds to an IRA can offer significant tax benefits.
Traditional IRA contributions provide tax advantages by exempting a portion of your income from taxes. The contribution limits for IRAs can vary from year to year, and in 2024, individuals under age 50 can contribute up to $7,000, while those aged 50 and older can contribute up to $8,000. Therefore, making a $5,000 contribution to an IRA this year effectively reduces taxable income by that amount.
Beyond tax benefits, IRAs also serve as a valuable tool for investing in one’s future. By maximizing IRA contributions annually, individuals have the opportunity to grow their savings substantially over time. The power of compounding can yield significant returns, potentially resulting in a substantial nest egg decades down the line.
Your investments could go a long way
Investing your IRA funds conservatively can safeguard your portfolio against market volatility. However, if you’re investing with a long-term horizon, such as retirement, allocating a significant portion to stocks can yield substantial returns. With a 30-year time frame, loading your IRA with stocks can be particularly advantageous.
Historically, the stock market has delivered an average annual return of 10% over the past five decades, factoring in both prosperous and challenging years. For example, if you contribute $7,000 to your IRA this year and achieve a 10% annual return, after 30 years, your investment could grow to approximately $122,000. Increasing your contribution to $8,000 under the same scenario could potentially result in a balance of around $140,000 after three decades.
It’s essential to note that these projections only consider the contributions made in 2024. If you already have funds in your IRA or continue to contribute annually, your overall balance could be significantly higher in the future. Nevertheless, maximizing your IRA contributions, even for a single year, can yield substantial results.
According to Northwestern Mutual, the average American in their 60s has saved $112,500 for retirement. However, by maxing out your IRA with a $7,000 contribution this year alone, you could potentially surpass that balance in 30 years based on the calculations outlined above.
It’s okay if you can’t max out your IRA
Maxing out your IRA contributions in 2024 could significantly benefit your future financial security. However, if allocating such a substantial amount of money is challenging, or even impossible, don’t be discouraged.
Instead, contribute what you can afford. Even if it’s just $100 this year, every little bit helps. If you can manage to save $200 or more, that’s even better.
For instance, let’s assume you contribute $500 to your IRA in 2024. With a 10% annual return, that amount could potentially grow to over $8,700 in 30 years. Therefore, if maxing out your contributions isn’t feasible right now, focus on saving what you can and aim to increase your contribution rate over time as your financial situation improves. The key is to take proactive steps toward building your retirement savings, regardless of the initial amount.