Scrambling to compile your receipts and W-2s in advance of this year’s April 18 federal tax filing deadline?
Don’t forget about your IRA. You can contribute to your traditional or Roth IRA for 2016 until federal taxes are due. What does that mean for you? It means you have until April 18 to contribute to your 2016 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, and it earned an approximate 6% in annual interest. In that case, after a year, that $10,000 would have grown to $10,600. Reinvest that $600 in the same account, with the same hypothetical 6% annual interest earned, and given the principle would began the year at $10,600 – and in another year you could conceivably earn $636 in interest and have $11,236 in the account. Reinvest those earnings and… well, you get the idea.
Over the years – and when saving for retirement, the best way to measure is in longer periods of time – the accumulated interest accrues more and more interest, accelerating retirement savings along a curve. One way to accelerate potential earnings? Put in more principal. By maximizing your contribution you increase the principal amount that may generate interest, thereby increasing the amount that compounds.
Taxes and retirement accounts:
Traditional IRAs allow you to deduct the amount of your annual contribution from your taxable income. 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 your taxable income and potentially the amount of tax you owe. (It should be noted that traditional IRAs are taxed when funds are withdrawn in retirement.)
A Roth IRA is funded with after-tax dollars – there’s no annual tax deduction available – and has income restrictions. However, withdrawals are tax-free when taken after age 59 ½ if the account has been in place for at least five years. (Verify that, should be in disclosure). Talk to your financial advisor about how a traditional or Roth IRA might fit within your plan or financial situation.
Maximize doesn’t necessarily mean maximize:
The IRA contribution limit for 2016 and 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 what makes sense for your financial situation. The annual deadline is the deadline – once it passes you won’t get another chance in that 12-month period. The important thing is to have a long-term plan for retirement and take steps toward achieving financial goals over time.
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