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Think about maximizing your 2016 IRA contribution


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.

Compound interest:

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 (It should be noted that traditional IRAs are taxed when funds are withdrawn in retirement.)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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This information is provided for informational and educational purposes only. Waddell & Reed believes the information has been obtained from sources considered to be reliable, but does not guarantee the accuracy of the information provided. This information is not meant to be a complete summary or statement of all available data necessary for making financial or investment decisions and does not constitute a recommendation.

Please note that the information provided may include references to concepts that have legal, accounting and tax implications. It is not to be construed as legal, accounting or tax advice, and is provided as general information to you to assist in understanding the issues discussed. Neither Waddell & Reed, Inc., nor its Financial Advisors give tax, legal, or accounting advice.

This information is not meant as financial or investment advice pertaining to your personal situation. The selection of appropriate investment, insurance or planning options and/or strategies should be made on an individual basis after consultation with appropriate legal, tax and financial advisors. Nothing contained herein is intended as a solicitation or an offer to buy or sell any product or service mentioned and they may not be suitable for all investors.

Withdrawal of earnings from a Roth IRA before age 59½ and before the account is 5 years old may be subject to taxes and a 10% penalty.

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