- Give your money a chance to grow.
- Get tax benefits.
- The earlier you start contributing, the more opportunity you have to build wealth.
It can pay to save in an IRA when you're trying to accumulate enough money for retirement. There are tax benefits, and your money has a chance to grow. Every little bit helps and you can still put money into an IRA for the 2019 tax year.
Due to the impact of COVID-19, the new date for filing federal income tax returns and for making contributions to your IRA for 2019 is July 15, 2020. It is currently unclear if state filings and payments are affected; taxpayers should consult their advisors for state tax information.
If your employer doesn't offer a retirement plan—or you're self-employed—an IRA may make sense.
Read Viewpoints on Fidelity.com: No 401(k)? How to save for retirement.
Here are some reasons to make a contribution now
1. Put your money to work
Eligible taxpayers can contribute up to $6,000 per year, or your taxable compensation for the year (whichever is less), to a traditional or Roth IRA, or $7,000 if they have reached age 50, for both tax years 2019 and 2020 (assuming they have earned income at least equal to their contribution). It's a significant amount of money—think about how much it could grow over time.
Consider this: If you're age 25 and invest $6,000, the maximum annual contribution in 2019, 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 (We used a 7% long-term compounded annual hypothetical rate of return and assumed the money stays invested the entire time.)
The age you start investing in an IRA matters: It's never too late, but earlier is better. That’s because time is an important factor when it comes to compound growth. Compounding is what happens when an investment earns a return, and then the gains on the initial investment are reinvested and begin to earn returns of their own. The chart below shows just that. Even if you start saving early and then stop after 10 years, you may still have more money than if you started later and contributed the same amount each year for many more years.
2. You don't have to wait until you have the full contribution
The $6,000 (or your compensation limit) IRA contribution limit is a significant sum of money, particularly for young people trying to save for the first time.
The good news is that you don't have to put the full $6,000 into the account all at once. You can automate your IRA contributions and have money deposited to your IRA weekly, biweekly, or monthly—or on whatever schedule works for you.
Making many small contributions to the account may be easier than making one big one.
It's important to note that you don't have to contribute up to the limit each year. Save what you can on a regular basis—even small amounts can make a big difference over time.
3. Get a tax break
IRAs offer some appealing tax advantages. There are 2 types of IRAs, the traditional and the Roth, and they each have distinct tax advantages and eligibility rules.
Contributions to a traditional IRA may be tax-deductible for the year the contribution is made. Your income does not affect how much you can contribute to a traditional IRA—you can always contribute up to the annual limit as long as you have enough earned income to cover the contribution. But the deductibility of that contribution is based on your modified adjusted gross income (MAGI) and the access you and/or your spouse have to an employer plan like a 401(k). If neither you nor your spouse are eligible to participate in a workplace savings plan like a 401(k) or 403(b), then you can deduct the full contribution amount, no matter what your income is. But if one or both of you do have access to one of those types of retirement plans, then deductibility is phased out at higher incomes.2 Earnings on the investments in your account can grow tax-deferred. Taxes are then paid when withdrawals are taken from the account—typically in retirement.
Just remember that you can defer, but not escape, taxes with a traditional IRA: Starting at age 72, required minimum withdrawals become mandatory, and these are taxable (except for the part—if any—of those distributions that consist of nondeductible contributions).3 If you need to withdraw money before age 59½, you may be hit with a 10% penalty unless you qualify for an exception.4
The CARES act temporarily waives required minimum distributions (RMDs) for all types of retirement plans (including IRAs, 401(k)s, 403(b)s, 457(b)s, and inherited IRA plans) for calendar year 2020. This includes the first RMD, which individuals may have delayed from 2019 until April 1, 2020.
On the other hand, you make contributions to a Roth IRA with after-tax money, so there are no tax deductions allowed on your income taxes. Contributions to a Roth IRA are subject to income limits.5 Earnings can grow tax-free, and, in retirement, qualified withdrawals from a Roth IRA are also tax-free. Plus, there are no mandatory withdrawals during the lifetime of the original owner. If you need to take an early withdrawal from a Roth IRA, withdrawals of earnings before age 59½ may be subject to both tax and early withdrawal penalties if withdrawn before the qualifying criteria are met.6
As long as you are eligible, you can contribute to either a traditional or a Roth IRA, or both. However, your total annual contribution amount across all IRAs is still $6,000 (or $7,000 if age 50 or older).
What's the right choice for you? For many people, the answer comes down to this question: Do you think you'll be better off paying taxes now or later? If, like many young people, you think your tax rate is lower now than it will be in retirement, a Roth IRA may make sense.
Need help deciding? Read Viewpoints on Fidelity.com: Traditional or Roth IRA, or both?
4. You may think you can't have an IRA, but maybe you can
There are some common myths about IRAs—especially about who can and who can't contribute.
Myth: I need to have a job to contribute to an IRA.
Reality: Not necessarily. A spouse with no earned income can contribute to a spousal Roth or traditional IRA as long as their spouse has earned income and the couple files a joint tax return. Note, however, that all other IRA limits and rules still apply.
Myth: I have a 401(k) or a 403(b) at work, so I cannot have an IRA.
Reality: You can, with some caveats—as mentioned earlier. For instance, if you or your spouse have access to a retirement plan like a 401(k) or 403(b) at work, your traditional IRA contribution may not be deductible, depending on your modified adjusted gross income (MAGI).2 But you can still make a nondeductible, after-tax contribution and reap the potential rewards of tax-deferred growth within the account. You can contribute to a Roth IRA, whether or not you have contributed to your workplace retirement account, as long as you meet the income eligibility requirements.4
Myth: Children cannot have an IRA.
Reality: An adult can open a custodial Roth IRA (also known as a Roth IRA for Kids ) for a child under the age of 18 who has earned income, including earnings from typical kid jobs such as babysitting or mowing lawns, as long as this income is reported to the IRS.7
An adult needs to open and maintain control of the account. When the child reaches the age of majority, which varies by state, the account's ownership switches from the adult over to them.
Make a contribution
Your situation dictates your choices. If your employer doesn't offer a retirement plan—or you're self-employed—an IRA may make sense. But one thing applies to everyone: the power of contributing early. Pick your IRA and get your contribution in and invested as soon as possible to take advantage of the tax-free compounding power of IRAs.