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3 Smart Reasons to Max Out Your IRA
March 1, 2018
Make the most of your retirement savings for the 2017 tax season
We've all heard it: Sock away as much as you can for retirement.
It certainly makes sense. With company pensions going the way of rotary phones and fax machines, Americans are now largely responsible for their own retirement savings.
One of the most common ways to save is through a tax-advantaged savings account
such as an IRA.
In fact, more than 1/3 of all U.S. households have one.1
And it's not hard to see why millions of Americans have them – consistently funding an IRA can be one of the most effective ways to boost your retirement income.
But while contributing any amount is valuable, funding your IRA to the maximum
can also provide you with benefits you may not be aware of.
What fully funding your IRA can do for you
When you make the maximum contribution, it means you put as much in as allowable before the year's tax filing deadline arrives.
For tax year 2017, you have until April 17, 2018.
Maxing out your IRA can come with tangible benefits. Here are three to consider.
1. Tax advantages.
Funding your IRA to the maximum is a wise way to take advantage of tax-deferred opportunities to get closer to your retirement goals.
If you meet the requirements to deduct your IRA contribution, you could potentially lower your adjusted gross income by the amount you contribute.
Translation: More money available for your near-term goals with a traditional IRA.
One thing to note – this only applies to traditional IRAs, not Roth IRAs.
If you can deduct your traditional IRA contribution, you will pay taxes on the money you withdraw in retirement.
Roth IRAs operate in reverse – meaning you make contributions with dollars you've already paid taxes on. When you're ready to use the funds for retirement, if you meet the requirements, you don't have to pay taxes on your earnings.
In some cases, a Roth IRA may be a better option for you. It comes down to your overall funding objectives and personal situation.
2. Greater growth potential over time.
Maxing your IRA contributions annually could help your retirement income grow significantly, thanks to the power of compounding.
Think of it this way: Your money grows based on your principle + your potential earnings too.
Here's a hypothetical example of two savings options.2
If you put $100 in your IRA monthly, and do so consistently
for 20 years, you'll have contributed a total of $24,000 of your own money.
Assuming a 6% annual growth rate, your investments could be worth $46,435 in 20 years.
Instead of $100, what if you contributed $458 each
month to meet this year's $5,500 limit?
If you consistently did this for 20 years – and again assuming a 6% annual growth rate – your total savings could reach $212,673.
That's a $166,238 difference.
Translation: The more you put in,
the more your contribution has the potential to grow at an increasing rate. And the
more money you have in the end.
3. Higher limits with age.
Turning 50 comes with perks if you have an IRA. Why?
Because once you're 50, federal IRA rules let you contribute beyond the annual limit
– something known as catch-up contributions.
For the 2017 tax year, the maximum contribution would be $6,500. That's an extra $1,000 per year you could add. If you take advantage of this higher limit, it could potentially give your retirement savings a big boost.
Not only could you see significant compound growth, but you could also benefit from increased tax advantages.
Translation: If you didn't start saving
as soon as you wish you'd had, you have the chance to make a comeback.
Despite these compounding advantages and tax benefits, you may still have reservations about fully funding your IRA. You feel like you should, but you don't know if you can.
It's normal to feel that way. That's where a conversation with a financial representative can help.
Connect with a Thrivent Financial representative before the April 17 tax filing deadline to work through your questions about increasing your IRA contribution amounts.
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1 The Role of IRAs in U.S. Households' Saving for Retirement, 2017. ICI Research Perspective, December 2017, Vol. 23, No. 10.
2 This hypothetical example is meant for illustrative purposes only. It does not take into account market fluctuations.
Thrivent Financial representatives and employees cannot provide legal, accounting, or tax advice or services. Work with your Thrivent Financial representative and, as appropriate, your attorney and tax professional for additional information.