Maximize the Value of Your IRA

Individual retirement accounts (IRAs) continue to be one of the most powerful ways to accumulate funds for a financially secure retirement for a multitude of reasons:

  • IRAs are convenient ways to save money
  • IRAs are available to everyone with wages
  • Earnings within IRAs are not subject to current taxation
  • Contributions may be deductible in some cases
  • Additional contributions may be made by those ages 50 and above
  • With self-directed IRAs, there is investment flexibility
  • There is flexibility when you begin taking money out of IRAs, especially with Roth IRAs.

The keys to maximizing the ultimate value of your IRA are simple: contribute as much as you can, contribute as early as you can and earn as much as you can. Here are four ways to put those keys to work.

Make Contributions
Everyone with earned income (wages) is eligible to contribute to an IRA. You can contribute to a regular IRA regardless of your income. It may be tax-deductible if you are not a participant in a company sponsored plan or if your adjusted income is below certain levels. Roth IRA contributions are not deductible, but can be made by those with who meet adjusted gross income. See the current listing of contribution and deduction limits. [PDF]

Take Advantage of the Catch-up Provision
For the past several years, individuals age 50 and above have been eligible to contribute extra amounts to their IRAs. See how much that amount is for the current tax year. [PDF]

Make Contributions Early
The earlier you make contributions, the earlier your money begins earning on a tax-deferred basis. The earliest you can make contributions is January 1. By making your contribution early, you are more likely to make an extra contribution over your working career and it adds up. For someone age 30, an extra $5,500 contribution and the additional year’s earnings can mean an extra $39,880 (assuming an earnings rate of 6%) when they retire at age 65. For a 45-year-old, the extra funds could amount to over $16,000.

Invest Your IRA Wisely
Your IRA is, or will become, a significant part of your net worth. How it is invested deserves the same attention you give your other investments. Be sure to include your IRA in your overall investment planning and apply the same principles of asset allocation, diversification and risk tolerance. Because the funds in your IRA will remain there for extended periods of time, you should take a long term approach with how the funds are invested. If you choose a lower risk fixed income approach, consider longer term CDs instead of shorter-term savings accounts or money market funds. If you are considering equity investments, remember these funds will have many years to grow and choose wisely.

You will ultimately be responsible for your retirement and the decisions you make on managing your investments are important. Doing your homework and using the services of a qualified professional can make a large difference.

As with any investment plan, please contact your tax advisor for questions on how the plan might affect your taxes.