A lot of people are continuing to live paycheck to paycheck these days in the wake of lingering inflation. So if you’re in that boat, contributing funds to an IRA is something that may have to wait.
But let’s say you’re in a better financial position than that. Maybe your bills are manageable and don’t eat up your entire paycheck month after month. If so, it definitely pays to contribute money to an IRA for the tax benefits alone.
Traditional IRA contributions exempt a portion of your income from taxes. The limits for IRAs can change every year. In 2024, you can put up to $7,000 into an IRA if you’re under age 50 or up to $8,000 if you’re 50 or older. So if you make, say, a $5,000 contribution this year, that’s $5,000 of income the IRS won’t be able to tax you on.
But another great thing about IRAs is that they allow you to invest your money for the future. And if you’re able to max out your IRA this year, you may be amazed at how much money you have three decades from now.
Your investments could go a long way
You could choose to invest your IRA conservatively to protect your portfolio from wild swings. But if you’re investing for a far-off milestone like retirement, then it pays to go heavy on stocks. And if you have a 30-year window between now and the end of your career, then it especially pays to load your IRA with stocks for strong returns.
Over the past 50 years, the stock market has rewarded investors with an average annual 10% return. That number accounts for both good years and bad.
So, let’s say you put $7,000 into your IRA this year. If you earn a 10% yearly return on that money, in 30 years, it’ll be worth around $122,000. If you put in $8,000 and score that same return, in 30 years, it’ll be worth about $140,000.
But remember, these numbers only account for the contributions you’re making in 2024. If you already have funds in your IRA or you continue to contribute each year, your balance is apt to end up even higher down the line. The point, however, is that maxing out your IRA for even a single year could have huge results.
Northwestern Mutual reports that the average American in their 60s has $112,500 saved for retirement. But based on the calculations above, maxing out your IRA at $7,000 this year alone might leave you with a higher balance than that in 30 years.
It’s okay if you can’t max out your IRA
Maxing out an IRA in 2024 could do a lot of great things for your future. But it may be difficult, or impossible, to part with that much money — especially if you’ve been struggling lately.
If that’s the case, just do the best you can. Save $100 this year if that’s all you can swing. If you can push yourself to $200, even better.
In fact, let’s say you contribute $500 to your IRA in 2024. At a 10% return, in 30 years, that sum could grow to over $8,700. So if maxing out your contributions for the year isn’t feasible, don’t dwell on that. Instead, focus on the amount you can save, and aim to raise your contribution rate from one year to the next, or as your financial situation allows.
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