When you think of a retirement plan, what comes to mind?
Published March 5, 2019
The most popular retirement plan is the IRA account.
IRA stands for Individual Retirement Arrangement, allowing individuals (as opposed to groups of people) to arrange for their retirement. Strictly speaking, then, an IRA is not an investment, but simply money the tax code treats differently than the rest of your earnings.
It helps to think of an IRA as a bucket. Put $3,000 into that bucket, and the IRS allows you to use that money to buy investments. As long as you keep the money in the bucket for the required length of time, you won’t have to pay taxes on the profits you earn. Because you paid no taxes on the growth of that money, it’s referred to as tax-deferred growth.
Money that is not taxed can grow quicker than money that is, so tax-deferred growth is a real benefit. The idea of an IRA is to take money that ordinarily is subject to taxes and invest it more tax-efficiently. Contributions and earnings aren't taxed until you take a withdrawal.
The IRS allows contributions to an IRA to defer money from taxes up until April 15 of the following year, or the year taxes are due. But it could be financially savvy to make your IRA contribution as early in the year as possible.
With an IRA, you are saving money, not spending money. The additional interest you earn over the year can really add up. According to Ric Edelman, author of “The Truth About Money,” you could have up to $53,000 more over 30 years by opening your IRA account on January 1 instead of April 15 of the following year. His calculation, however, is based on an investment that gives you a 10% return, which is not reflective of any specific product or investment and is for hypothetical purposes only. But, even at a lower rate, you’re still looking at a significant amount of savings due to tax-deferral. Put the money away now and you could have increased benefits at retirement.
Questions about IRA accounts? Stop by any Maps Branch or check out IRA account information online.