Can $5,500 IRA Contributions Really Add Up?

Using IRAs in your retirement planning can help you secure your financial future.

02/23/2015

A wise person once said that humans tend to over-estimate what they can accomplish in the short-term and under-estimate what they can accomplish in the long-term.  This holds very true for IRA contributions, especially now that the annual contribution limit is $5,500 for 2015.  For those age 50 and above, the limit is $6,500.
 
IRAs offer a number of benefits:

  • Regular savings
  • Potential tax-deductible contributions (depending on income levels and other retirement plan participation)
  • Tax-deferred compounding
  • Potential tax-free distributions (in the case of Roth IRAs)
 
It can be easy to put off or fail to make contributions to an IRA.  Retirement may seem like a long way off and $5,500 may not sound like a lot of money to save.  But look at how these contributions can accumulate.
 

Year

Total Contributions IRA Value Savings Account Value
1 $5,500 $5,500 $5,500
2 $11,000 $11,330 $11,238
3 $16,500 $17,510 $17,223
4 $22,000 $24,060 $23,467
5 $27,500 $31,004 $29,981
6 $33,000 $38,364 $36,776
7 $38,500 $46,166 $43,865
8 $44,000 $54,436 $51,260
9 $49,500 $63,202 $58,974
10 $55,000 $72,494 $67,022
15 $82,500 $128,018 $112,785
20 $110,000 $202,321 $169,326
30 $165,500 $434,820 $325,485
Taxes Due*   -$75,410 None
Net After Tax   $359,410 $325,485
 
* Assumes contributions to the IRA were not tax deductible and therefore taxes are not calculated on the total amount of the non-deductible contributions when received.  An earnings rate of 6% was used.  A tax rate of 28% was applied to the earnings in the savings account.
 
No one can accurately predict what level of earnings you may earn on your investments.  It may be difficult to foresee what the future tax laws will be.  However, using IRAs as part of your retirement planning strategy can help you have the type of financially secure retirement you desire.

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