Four reasons to contribute to an IRA

It can pay to save in an IRA. There are tax benefits, and your money has a chance to grow.

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Learn about the potential benefits

Whether you're opening a new IRA or transferring an IRA from another provider to Fidelity, the process is easy and help is only a phone call away.

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Pick the type of IRA—Roth or traditional—and get your contribution in and invested as soon as possible to take advantage of the tax benefits of 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. There are tax benefits, and your money has a chance to grow. The deadline for a 2017 traditional or Roth IRA contribution is the same as the 2017 tax-filing deadline in April 2018, but you don't have to wait until the deadline to contribute. Here are some reasons to make a contribution now.

1. Put your money to work.

Eligible taxpayers can contribute up to $5,500 to a traditional or Roth IRA, or $6,500 if they have reached age 50, for 2017. It’s a significant amount of money, but think about how much it could grow to over time.

Consider this: If you’re age 35 and invest the maximum $5,500 2017 IRA contribution for growth, that one contribution could grow to almost $59,000 35 years later. If you’re age 50 or older, you can contribute $6,500, which could grow to more than $69,000 35 years later.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. 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 many more years.

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

The $5,500 IRA contribution limit may seem like 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 make it 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 doing one big one.

3. Get a tax break.

IRAs offer some appealing tax advantages. There are basically two types of IRAs, the traditional and the Roth, and they each have different tax advantages and eligibility rules.

Contributions to a traditional IRA may be deductible for the year the contribution is made. There are no income limits for being eligible for a tax deduction, unless you or your spouse participate in a workplace savings plan like a 401(k) or 403(b).  Deductibility is then phased out at higher incomes.2 Earnings can grow tax free. Taxes are then paid when withdrawals are taken from the account—typically in retirement. There's no escaping taxes with a traditional IRA: At age 70½, minimum withdrawals are mandatory.

On the other hand, you make contributions to a Roth IRA with after-tax money, so there are no deductions. Contributions to a Roth IRA are subject to income limits.3 Like a traditonal IRA, earnings can grow tax free. But unlike the traditional IRA, withdrawals from a Roth IRA are also tax free, and there are no mandatory withdrawals.4

As long as you are eligible, you can have either a traditional or a Roth IRA, or both.

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 can be the smarter choice.

Need help deciding? Use our Roth vs. traditional IRA evaluator.

4. You may think you can’t have an IRA, but make sure.

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 nonworking spouse, as long as his or her spouse has taxable income up to the contribution limit of $5,500 for 2016, or $6,500 for over 50, can contribute to a Roth or traditional IRA. Alimony is also considered income, so a nonworking person receiving alimony may also be able to contribute to an IRA.

Myth: I have a 401(k) or a 403(b) at work, so I cannot have an IRA.

Reality: You can, with some caveats. For instance, if you or your spouse contributes to a retirement plan—like a 401(k) or 403(b)—at work, your traditional IRA contribution may not be deductible based 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-free growth within the account. You can contribute to a Roth IRA, even if you have contributed to your workplace retirement account, as long as you meet the income eligibility requirements.3

Myth: Children cannot have an IRA.

Reality: An adult can open a Fidelity Roth IRA for Kids for a child under the age of 18 with income, including earnings from typical kid jobs such as babysitting or mowing lawns.5

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 can be transferred to his or her control.

Make a contribution

Your situation dictates your strategy. But one thing applies to all: 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.

Learn more

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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. The hypothetical examples assume the following: one annual $5,500, or $6,500, IRA contribution 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. For a Traditional IRA, full deductibility of a contribution for 2017 full deductibility of a contribution is available to active participants whose 2017 Modified Adjusted Gross Income (MAGI) is $99,000 or less (joint) and $62,000 or less (single); partial deductibility for MAGI up to $119,000 (joint) and $72,000 (single). In addition, full deductibility of a contribution is available for working or nonworking spouses who are not covered by an employer-sponsored plan whose MAGI is less than $186,000 for 2017 partial deductibility for MAGI up to $196,000.
3. If you’re single, or file as head of household, the ability to contribute to a Roth begins to phase out at MAGI of $116,000 and is completely phased out at $131,000. If you’re married filing jointly, the phaseout range is $183,000 to $193,000.
4. A distribution from a Roth IRA is tax free and penalty free, provided that the five-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. Minimum required distributions do not apply to the original account owner, although heirs will be subject to them.
5. In general, anything that can be legitimately reported as taxable income on a form W-2 is acceptable (although the fact that the income is taxable doesn’t necessarily mean that taxes are paid—the amount could be below the child’s exemption). So money children earn on a paper route is OK, but money given to them by their parents as an allowance probably isn’t. Money earned by a child employed in a family business may be acceptable, but documentation will be required, and the amounts must be reasonable—you wouldn’t be able to claim to have paid your 10-year-old $300 for one hour of sealing envelopes. Always consult a tax expert when in doubt.
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Whether you're opening a new IRA or transferring an IRA from another provider to Fidelity, the process is easy and help is only a phone call away.

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