Though most of us know we need to save for the future, most of us have not saved nearly enough for what we need. The reason for this can be summed up in a simple phrase: “Easier said than done.”
Many of us feel we don’t have the time or money or financial education we need to make the right decisions on investing for the future.
Even when we want to make the right decisions, there are so many competing demands on our limited time and income that we’re constantly being forced to re-prioritize based on those demands:
Young professional? You’re probably trying to find the balance between building your first savings account and paying off student loans.
Raising a family? You might be entrenched in the battle of unexpected expenses and creeping costs of everything from childcare to groceries to education.
Nearing retirement? You could feel it’s too late to prepare financially for life after the workforce.
In all of these scenarios, with all of these specific competing demands, what age is the right one to invest in an IRA?
All of them.
The answer sounds like a cop out. After all, one type of account couldn’t possibly be the answer for every age. But the truth is that no matter where you are in life, an IRA can benefit you in ways other financial products cannot.
At every stage of life’s journey, even if you can’t do everything you would like to prepare for your financial future, doing something is better than doing nothing. And investing in an IRA is often the best first step.
IRA Benefits for Young Professionals
IRAs are synonymous with retirement, which is why they might feel irrelevant to someone just starting their career. Who can think about retirement when you’re still trying to afford living without roommates, pay off student loans, and still occasionally enjoy time with friends?
That’s why we should banish the word “retirement” and instead think of IRAs as “Individual Reinvention Accounts.”
Yes, IRAs were created to incentivize people to build their retirement funds. But they offer so much more than that.
People in their twenties and thirties may think they’re no Einsteins when it comes to investing, but they should heed the advice of someone who was: Albert Einstein.
Einstein is said to have once declared that “the most powerful force in the universe is compound interest.” Because of this, young investors are in the most powerful position to make decisions that will reap rewards for years to come.
Compound interest means that starting today – this week, this month, this year – makes a huge difference in where you will end up. For instance, if you decide to invest $5,000 a year until you reach the age of 65, starting at age 21 instead of age 20 will cost you $65,000 (assuming a 6% growth rate).
Here’s another example to illustrate the power of compound interest: you would end up with more money by age 65 if you invested $5,000 when you were 25 and literally did nothing else than if you invested $20,000 but waited until you were 45 years old.
As a younger investor you may feel like these financial decisions are better left to your future self, but right now is when you may have the most power you’ll ever have to chart your financial destiny.
So don’t wait on an IRA until you have “enough” money to contribute. Contribute as much as you can spare now (even if it’s only $25 or $50 per month) so you can start compounding on your “reinvention” account.
IRA Benefits You Can Enjoy While Raising a Family
Anyone raising a family understands the need to prioritize. Parents often have to deal with finding a way to pay off the tail end of their student loans while also saving for their kids’ college tuition, handling a mortgage, and preparing for the various unexpected expenses that always seem to surprise us.
All of this can make an IRA (or any savings for your own future) seem out of reach.
But if you’re a parent, investing in an IRA could be one of the best things you do for yourself and for your kids. Why? Because of tax incentives and the importance of retirement building.
Any money you put into a traditional IRA doesn’t get taxed until you withdraw – even if it earns dividends and interest. That can’t be said about your regular investments or your savings account. Plus, you may be able to deduct your IRA contributions at the end of the year, enabling you to not only defer taxes, but to also save on them as well. Tax deferment + tax deductions = more money in your pocket when you need it most: now.
Retirement may seem especially far off when you are thinking about buying a home or saving for your kids’ college expenses. But part of why we call the IRA your “Individual Reinvention Account” is that it can help here as well.
While paying for a home or college with an IRA is permitted, you should think of these as “in case of emergency” options because they entail sacrificing the IRA benefits of tax-protected retirement savings and serve as an opportunity to take advantage of the power of compound interest.
Buying a home with an IRA
You are allowed to use up to $10,000 of your IRA funds to purchase a new home as long as you haven’t owned a primary residence for two or more years. And if you’re married, you and your spouse can each tap your IRA for a total of $20,000 to be used for a down payment or other costs involved in buying or building a home.
Paying for education with an IRA
You can also use an IRA to pay for higher education for yourself, your spouse, or your children or grandchildren. These funds can be used to pay for tuition, books, supplies and – as long as the student is enrolled at least half-time – room and board.
IRA Benefits for Those Preparing for Retirement
As you’re getting closer to retirement, you might be thinking that it’s too late to invest in an IRA. Not true! If you’re over 70 ½, you can no longer make contributions to a traditional IRA, but you can make rollover contributions.
If you’re under 70 ½, you can keep on making those contributions. The only tax deduction limits you’re subject to apply to all ages and are based on your other retirement accounts and/or your annual income.
Why should you think about this as you’re nearing retirement? Because it’s never too late to invest your money.
Money in the bank is prone to inflation. Money invested in an IRA gets a tax buffer. Why not keep your money working for you even after you’re ready to stop working?
The more you do now to make your money grow, the more freedom and flexibility you’ll have when it’s time to make use of it. While you may want to consider less risky investments, you shouldn’t stop investing altogether. Keep making use of that IRA, even while you’re in the home stretch, so you can enjoy the next phase of your life.
Make sure to look into the tax considerations with respect to rollover contributions and remember there are required minimums to take out from your IRA once you reach 70 1/2.
The Best Time to Invest is Always Now
IRAs are all about setting your money up for tax deferred growth. And if your money grows, so too does your freedom and flexibility, opening the door for opportunities you may not have had otherwise.
The best time to invest is now. The best time to take control of your money is now. You work hard enough. Why not let your money work for you too?