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3 reasons to contribute to an IRA

Key takeaways

  • 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.

If your employer doesn't offer a retirement plan—or you're self-employed—an IRA may make sense. And if you have a 401(k), an IRA can help you build your nest egg faster.

Read Viewpoints on No 401(k)? How to save for retirement

For the 2024 calendar year, the contribution window will be open through April 15, 2025. Here are 3 reasons to contribute to an IRA now.

1. Put your money to work

For the 2024 tax year, eligible taxpayers can contribute up to $7,000 or their taxable compensation for the year (whichever is less), to a traditional or Roth IRA, or $8,000 if they have reached age 50 (assuming they have earned income at least equal to their contribution).

Another important consideration is that if a married couple files jointly, a nonworking spouse may be able to contribute to their own IRA if the couple's total compensation (minus any potential IRA contributions from the working spouse) is at least equal to the contribution.

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.

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Starting early makes a difference. Saving for 10 years starting at age 25 results in a higher balance than saving for 32 years starting at age 35.
This hypothetical example assumes the following: (1) annual IRA contributions on January 1 of each year for the age ranges shown with no withdrawals through age 67, (2) annual $7,000 contribution for first year, (3) an annual nominal rate of return of 7%, and (4) 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 pre-tax (deductible) contributions from traditional IRAs 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. 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 a 7% annual nominal rate of return also come with risk of loss.

2. You don't have to wait until you have the full contribution

The $7,000 (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 $7,000 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. One thing to be aware of—be sure not to contribute more than the annual limit. There can be a tax penalty levied each year on the excess until it's corrected.

Read Smart MoneySM: What happens if you overcontribute to an IRA?

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.1 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). If you need to withdraw money before age 59½, you may be hit with a 10% penalty unless you qualify for an exception.2

On the other hand, after-tax contributions to a Roth IRA are not allowed to be deducted on your income taxes. Contributions to a Roth IRA are subject to income limits.3 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.4

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 $7,000 in 2024 ($8,000 for age 50 and up).

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 Traditional or Roth IRA, or both?

Make a contribution

Your situation dictates your choices. 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 make the most of the tax-advantaged compounding power of IRAs.

Is an IRA right for you?

We can help you decide whether you might want a traditional, Roth, or rollover IRA.

More to explore

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.

1. For a traditional IRA, for 2024, full deductibility of a contribution is available to covered individuals whose 2024 Modified Adjusted Gross Income (MAGI) is $123,000 or less (joint) and $77,000 or less (single); partial deductibility is available for MAGI up to $143,000 (joint) and $87,000 (single). In addition, full deductibility of a contribution is available for non-covered individuals whose spouse is covered by an employer-sponsored plan for joint filers with a MAGI of $230,000 or less in 2024, and partial deductibility is available for MAGI up to $240,000. If neither you nor your spouse (if any) participates in a workplace plan, then your traditional IRA contribution is always tax deductible, regardless of your income. If neither you nor your spouse (if any) is a participant in a workplace plan, then your traditional IRA contribution is always tax deductible, regardless of your income. 2. You are always able to take money from your IRA. Some withdrawals may be taxable and some may be subject to a 10% early withdrawal penalty. If you are over age 59½, you aren't subject to a 10% early withdrawal penalty. 3. For tax year 2024, if you're single, the ability to contribute to a Roth IRA begins to phase out at MAGI of $146,000 and is completely phased out at $161,000. If you're married filing jointly, the phaseout range is $230,000 to $240,000. 4. A distribution from a Roth IRA is tax-free and penalty-free, provided that the 5-year aging requirement has been satisfied and at least one of the following conditions is met: you reach age 59½, become disabled, make a qualified first-time home purchase ($10,000 lifetime limit), or die. Required minimum distributions do not apply to the original account owner, although heirs will be subject to them.

Recently enacted legislation made a number of changes to the rules regarding defined contribution, defined benefit, and/or individual retirement plans and 529 plans. Information herein may refer to or be based on certain rules in effect prior to this legislation and current rules may differ. As always, before making any decisions about your retirement planning or withdrawals, you should consult with your personal tax advisor.

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