When you are saving money for your retirement you should be taking advantage of the significant tax benefits offered through Individual Retirement Arrangements (IRA).
By investing your money through an IRA, you can claim a tax deduction on your contributions. You won’t pay any taxes on the interest your contribution earns each year. Instead, when you take your money out after age 59 ½, you will pay tax on your contributions and the interest it earned.
This tax deduction, and the fact that you will owe no taxes on your investments during the many years you are saving, will have a significant impact on how large your retirement nest egg will be.
Let’s say you invested $5,000 a year and your money earned 8% per year. If you invested this money through an IRA, you would have about $167,000 after 20 years. This would be 28% more money after taxes than if you invested your money outside an IRA. That’s a big difference!
There are a number of different IRA options you may be eligible for: a Traditional IRA, SIMPLE IRA, SEP IRA, Roth IRA.
Roth IRA
The Roth IRA option works differently than all the other IRAs.
With a Roth IRA your contributions are not tax deductible. But when you take money out of a Roth IRA you will not pay taxes on your contributions or the interest it earned over the years.
In the long run, a Roth IRA is probably a better choice than other IRAs.
It’s best to make retirement contributions for your IRA as soon as possible each year. The earlier in the year you save money, the more you will have in retirement.
Don’t let the tremendous tax savings available with IRAs pass you by. Start by saving a small amount of money each month, even if it’s only $5 a day.
If you saved $5 a day for 5 days a week you would have $1,250 at the end of the year.
If you invested this in an IRA that earned 8% each year, you would have $19,127 at the end of just ten years.
It’s never too late to save money. If you saved $10 a day at age 47 and earned 8% a year in an IRA, you would have $294,000 by the time you reached age 65.Choose to save. You can do it!
Tom Copeland - www.tomcopelandblog.com
Image credit: https://www.stratatrust.com/insights/maximizing-your-2020-and-2021-ira-contributions/
For more information, see my book Family Child Care Money Management and Retirement Guide.
