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Avoid this common IRA mistake

Key takeaways

  • Many people who make yearly contributions to traditional IRAs or Roth IRAs forget to take the next step to invest the money.
  • If you are overwhelmed by your investing choices, there are ways to get help.
  • It's never too late to get started if you find you have cash in your tax-deferred accounts and you want to invest it.

Contributing to your IRA is something to feel proud of. Whether you sock away a bit of money regularly, or make one big contribution around tax time, it's great to keep putting money away for your future.

But there's an extra step with these accounts that too many people miss: If you don't designate the way to invest the money you contribute, it just sits in cash, week after week, not earning very much.

"Some people contribute for years but never invest the money," says Brittney Hopkins, an associate at Fidelity. Hopkins' job is to help people understand their finances better and figure out the next steps they should take.

In many cases, savers contribute to IRAs regularly but don't realize that these accounts work differently than workplace 401(k) plans, in which money may be invested according to a plan's qualified default investment alternative.

Despite many reminders and prompts, people often miss this step. Here's what you need to know.

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1. Congratulate yourself

Contributing is a great step: The key to long-term savings is simply to get started. Dates like the annual tax return filing deadline can be a good way to motivate yourself to save.

"There are some who will set up automatic transfers throughout the year, but most people just put in one amount, usually around April, for the year," says Andrew Jacob, a representative at Fidelity.

Consider this: If you're age 25 and invest $6,000, the maximum annual IRA contribution in 2022, that one contribution could grow to $89,847 after 40 years. If you're age 50 or older, you can contribute $7,000, which could grow to about $19,313 in 15 years.1 If you keep contributing yearly, your potential for growth could increase. (We used a 7% long-term compounded annual hypothetical rate of return and assumed the money stays invested the entire time.)

Tip: Read more about saving for retirement.

Source: Fidelity
This hypothetical example assumes the following: pre-tax contributions of $6,000 once a year until age 50, and then $7,000 until age 67 and an annual rate of return of 7%.2

2. Put your money to work

One reason many people miss the step of investing their contributions could be because they think the IRA itself is the investment. "It's an assumption people have," says Rodel Catahan, another Fidelity associate. "They ask questions like: How much does an IRA earn?"

The IRA is just the holder account where you put your contributions, but you have more options than just cash, including exchange-traded funds (ETFs), mutual funds, individual securities, and CDs. The process of investing the money can potentially be as easy as a few clicks, once you know what you want to do with it.

But a hurdle for many people is that the thousands of choices for funds can be overwhelming, and people get afraid of making the wrong decision, coaches say. If you have decision overload, there are lots of resources available for sorting through your choices, including our guide to investing ideas for your IRA and managed accounts.

This is how it can work out if you stick with it: One man Hopkins worked with had not invested his IRA contributions for nearly 10 years. After he started working with Hopkins, they developed a plan to put his $10,000 nest egg into a target-date fund. These types of funds invest based on their anticipated year of retirement. You don't need to adjust your asset allocation over time because the funds become more conservative the closer they get to their target retirement date. He's now in his 50s, so he'll have time before retirement to grow his assets.

Tip: Build your knowledge with our investing learning path.

Source: Fidelity
This hypothetical example assumes the following 2 scenarios with an annual rate of return of 7% for both: an initial investment of $10,000 after 15 years, or an initial investment of $10,000, plus additional catch-up contributions of $7,000 per year for those 15 years.2

3. Don't worry that it's too late

Often, the people who don't invest their IRA contributions notice the oversight when they are doing some other financial task. They will notice that the account they thought was invested for their goals and time horizon has been stalled while their other invested accounts may have grown significantly. They might also be prompted by an email or a representative.

One woman that Fidelity associate Ty Woodruff spoke to realized when she was settling her late husband's accounts that the IRA he left her had never been invested, and had $200,000 sitting in cash. "But it's never too late," says Woodruff. "I got her connected with the resources she needed, and she put together a plan to invest the money."

Source: Fidelity
This hypothetical example assumes the following: an initial investment of $200,000 and an annual rate of return of 7%.2

The key is not to give up. "At first, my clients may be upset or frustrated, but then they are appreciative when they get themselves back on track," says Woodruff.

Tip: Read more about planning strategies.

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1. The hypothetical examples assume the following: one annual $6,000, or $7,000 IRA contribution, as applicable, made on January 1 of the first year; a 7% annual rate of return; and no taxes on any earnings within the IRA. The ending values do not reflect taxes, fees, or inflation. If they did, amounts would be lower. Earnings and pretax (deductible) contributions from a traditional IRA are subject to taxes when withdrawn. Earnings distributed from Roth IRAs are income tax free provided certain requirements are met. IRA distributions before age 59½ may also be subject to a 10% penalty. Systematic investing does not ensure a profit and does not protect against loss in a declining market. Consider your current and anticipated investment horizon when making an investment decision, as the examples may not reflect this. The assumed rate of return used in this example is not guaranteed. Investments that have potential for a 7% annual rate of return also come with risk of loss. 2. The ending values do not reflect taxes, fees or inflation. If they did, amounts would be lower. Earnings and pre-tax contributions are subject to taxes when withdrawn. Distributions before age 59 1/2 may also be subject to a 10% penalty. Contribution amounts are subject to IRS and Plan limits. Systematic investing does not ensure a profit or guarantee against a loss in a declining market. This example is for illustrative purposes only and does not represent the performance of any security. Consider your current and anticipated investment horizon when making an investment decision, as the illustration may not reflect this. The assumed rate of return used in this example is not guaranteed. Investments that have potential for 7% annual rate of return also come with risk of loss.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Target Date Funds are an asset mix of stocks, bonds and other investments that automatically becomes more conservative as the fund approaches its target retirement date and beyond. Principal invested is not guaranteed.

Fidelity® Wealth Services provides non-discretionary financial planning and discretionary investment management through one or more Portfolio Advisory Services accounts for a fee. Advisory services offered by Fidelity Personal and Workplace Advisors LLC (FPWA), a registered investment adviser. Discretionary portfolio management services provided by Strategic Advisers LLC (Strategic Advisers), a registered investment adviser. Brokerage services provided by Fidelity Brokerage Services LLC (FBS), and custodial and related services provided by National Financial Services LLC (NFS), each a member NYSE and SIPC. FPWA, Strategic Advisers, FBS, and NFS are Fidelity Investments companies.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

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