Regardless of other changes, IRA plans will remain important for tax planning purposes. The good news is that some or all contributions may be deductible depending upon what plans are offered by employers. Taking control of retirement savings will mean that nearly everyone will have to consider how to use an IRA for the best return.
IRA contribution growth
A small contribution of $1,200 annually with a six percent return over 20 years would allow an accumulation of nearly $50,000, a $2,000 contribution with a six percent return would allow you to save nearly $78,000. Maximizing IRA contributions could result in retirement savings of almost $200,000 at the same rate of return.IRA savings should be started as early as possible. The sooner an IRA is opened, the more significant your savings becomes. There are other ways to increase your retirement savings such as:
Tax deferred savings
IRAs earnings are usually reinvested and because of that they generate additional earnings. At retirement, there may be taxes due, however opting for a ROTH IRA allows for the withdrawal funds tax-free depending on the requirements of the plan that is selected.
Contributions to a 401K plan in conjunction with contributions to an IRA can also boost retirement savings and minimize taxes due. 401K's can be use in many ways for those who face a change in their financial status. They often allow more leverage than simply having an IRA.
Investors who have multiple retirement accounts due to changing employers should consider consolidating them into one account. This helps investors avoid paying multiple annual fees, allows more control and increases the diversity of an investment portfolio.
Non-deductible contributions
Non-deductible contributions made to an IRA can also be used to enhance savings. Depending on the plan, these savings may also grow tax deferred. Tax deferred savings allow those who are in higher income brackets to save now and withdraw the funds later when their tax burden is usually lower.
Those who are self employed, will want to look into the various types of plans that are available. Many plans offer 'catch-up' options and vehicles like SEP plans may allow for contributions up to 24 percent of compensation (up to a preset limit which is $46,000 for 2011). It is also important to note that those who are self-employed can also open a 401(k) plan if they desire to do so.
Unless investors have a dire financial need, they should avoid withdrawing money from their IRA account(s) before they actually retire. These withdrawals can be very costly and may also result in penalties and additional taxes. In addition, these withdrawals often put a retirement nest egg at risk in the event that the investor is unable to replace the money they withdrew.
The easiest way to contribute to an IRA account is through automatic deposits. This provides not only convenience for investors, but also forces them to save for retirement without depending on investing monies after they have been paid. Investors should consider working with a tax adviser to understand what options are available to them for retirement planning and understand the tax deductible nature of their IRA contributions.
