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3 Reasons Why You Should Be Maximizing Your IRA Contributions

3 Reasons Why You Should Be Maximizing Your IRA Contributions

It is a common mistake among many people especially the millennials not to plan for their retirement. Yes, today there are thousands of opportunities which enable you to earn more money but at some point in life, one has to embrace retirement. As you age, your body is exposed to different health problems. To ensure that you are able to maintain a healthy lifestyle during your sunset years, you must plan for your retirement.

There are several options available to US citizens and some of them include 401(K), traditional IRA and Roth IRA among others. Financial experts do recommend regular contributions to any of the above retirement plans but did you know you can reap more when you max your contributions to your retirement accounts.

Well, here are reasons why financial experts believe you should contribute more to your retirement accounts.

Maximizes Your Returns

It is widely known that eligible tax payers have the opportunity of contributing $5,500 to both traditional IRA and Roth IRA but did you know as of 2017, you can increase the amount to $6,500 once you attain 50 years of age. This directive was issued for the year 2017 and may extend into 2018 or more. As you already know, this is a significant amount.

Let’s assume you are 35 years of age. If you were to invest $5,500 in your IRA, that contribution will increase to $59,000 after 35 years. When you are aged 50 years, your contribution will increase to $6,500. That means at age 70 ½, your account will be healthy and growing.

The basic concept in play here is that the more you contribute to the plan, the more the contributions appreciate. Furthermore, the larger the principal amount, the faster your interest rate will grow. All these benefits can be attributed to compounding.

Imagine this – you have a principal amount of $10,000. If you select a growth rate of 8% for a period of 20 years, the principal amount will appreciate to more than $45,000. If you increase the growth rate to 10% over the same period, the amount will total to over $67,000. So, start contributing more today!

Contributions Are Tax Deductible

The second benefit of maximizing your contributions to 401(k) and traditional IRAs is that you benefit from a tax break. The reason why 401(k) and Traditional IRA are tax deductible is because they are tax deferred. This means that you will only pay taxes when the funds are disbursed once you retire. As a result, you will end up paying less. Furthermore, your income will continue to grow.

If one of the spouses is currently participating in a 401(k), then their income will be eligible for tax deduction. For higher incomes, tax deductibility has been removed.

When it comes to Roth IRA, your money is available to you tax free. Furthermore, it gets to grow in the account tax free too. This means that when you max your contributions, your account will grow with tax free dollars in the long run.

Ways To Increase Your Contributions

Yes, I have said it over and over again, the higher the contributions to your retirement accounts, the more money you will have once you retire. When it comes to increasing your contributions, you cannot do so immediately. There are several factors you have to consider.

First and foremost, you must consider your spending because the extra amount going to your contribution must come from somewhere. To find out how much you are spending and how you can reduce your expenses, start by auditing your expenditure. You can cut out a few expenses in order to save and have a better life when you retire.

Secondly, you have to figure out how to increase your income. If cutting out your expenses is not enough, then you have to get a part time job, ask for a raise or seek a job that offers you better pay.

Lastly, you have to continue making maximum contributions to your retirement accounts. Failure to do so will affect the previous efforts made towards building wealth. Remember, the traditional IRA is tax deductible when the funds are dispersed to you during retirement.

Final Thoughts

As said earlier, planning your retirement is very important. Increasing your contributions to your retirement accounts is not all about having money to spend once you retire but it helps to maximize your returns thus building wealth.

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1 Comment

  1. I tell myself every year that I am going to open an IRA and contribute. Reading this made me realize I need to get going! Thank you for the reminders!

    Reply

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