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.
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
1. Put your money to work
For the 2023 tax year, eligible taxpayers can contribute up to $6,500 per year, or their taxable compensation for the year (whichever is less), to a traditional or Roth IRA, or $7,500 if they have reached age 50 (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 $6,500, the maximum annual contribution in 2023, that one contribution could grow to $97,334 after 40 years. If you’re age 50 or older, you can contribute $7,500, which could grow to about $20,693 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 $6,500 (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 $6,500 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 generally at age 73, required minimum distributions (RMDs) 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
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 a withdrawal from a Roth IRA, your contributions can be taken out at any time without any tax or penalty, but nonqualified withdrawals of earnings from those contributions, or of converted balances, may be subject to both taxes and penalties.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 $6,500 (or $7,500 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?
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.