Scrambling to compile your receipts and W-2s in advance of 2018’s federal tax filing deadline? Don’t forget about your IRA. You can contribute to your traditional or Roth IRA for 2017 until federal taxes are due. What does that mean for you? It means you have until April 17 to contribute to your 2017 retirement savings accounts. Here’s why you should consider maximizing your contributions.
Quick compound interest definition: Compound interest is reinvesting dividends from previous investments so they generate their own interest. Say you had $10,000 invested at 6% interest. In a year, you’ll have $10,600. Reinvest that $600 in the same account – the principle would now be $10,600 – and in another year you’ll earn $636 in interest and have $11,236 in the account. Reinvest those earnings for another year and you’ll make $674.16 for a total of $11,910.16. Reinvest those earnings and… well, you get the idea.
Over the years – and when saving for retirement, the best way to measure time is in decades – the accumulated interest accrues more and more interest, accelerating retirement savings along an exponential curve. One way to accelerate that curve? Put in more principal. By maximizing your contribution you increase the principal amount that generates interest, thereby increasing the amount that compounds which, as the decades pass, should help you meet your retirement savings goals.
Taxes and retirement accounts:
Traditional IRAs allow you to deduct the amount of your contribution from your taxes. While Waddell & Reed does not provide tax advice, contributing to a traditional IRA – traditional in this case meaning an IRA funded with pretax dollars – may allow you to reduce the amount of tax you owe in 2017. (It should be noted that traditional IRAs are taxed when funds are withdrawn in retirement.)
A Roth IRA is funded with post-tax dollars – there’s no deduction available – and has income restrictions. However, funds are tax free when withdrawn in retirement. Talk to your financial advisor about whether a traditional or Roth IRA is best for your situation.
Hopefully, you’re getting a refund back from the government. If so, you’ve got a bit of spare cash on hand that you didn’t necessarily expect. Which means you won’t miss it. Do yourself a favor and invest it in your retirement. Your life in retirement will thank you… though not for a few decades.
Maximize doesn’t necessarily mean maximize:
The IRA contribution limit for 2017, for both traditional and Roth IRAs, is $5,500 for those under age 50 and $6,500 for those age 50 and older. Those are big numbers for many people, but don’t get discouraged or feel intimidated. In this case, maximize doesn’t necessarily mean contribute to the limit; it means contribute as much as you can afford. If you can contribute to the limit – fantastic! If you can only spare a few hundred dollars and contributing to the limit will put you in dire financial straits, don’t worry. A few hundred dollars is fantastic too! The deadline is the deadline – once it passes you won’t get a second chance – and more important than contributing to the annual limit is being diligent about funding your retirement.
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