Opening an IRA can be one of the smartest financial decisions of your life. These retirement accounts have tremendous benefits, so if you don't have one year, maybe now is the time to finally open one.
Continue Reading Below
Source: 401kcalculator.org via Flickr.
We asked three of our contributors for the best reason to open an IRA right now, and here is what they had to say.
Selena Maranjian: One of the biggest reasons to open an IRA today is because it can cost you a lot if you don't. When it comes to your retirement, procrastination can be expensive and might even leave you eating hamburgers instead of steak. Beyond its tax advantages, one of the great benefits of an IRA (and most other investment accounts) is that it lets your investments grow over many years. That enables the magical effect of compounding.
Let's run through an example. For simplicity's sake, let's assume you're going to contribute $5,000 per year into an IRA, and that your money will grow at the stock market's long-term average annual growth rate of about 10%. Let's assume, too, that you're now 45 and you hope to retire at 65. If you make that $5,000 investment each year, over those 20 years, your IRA account will swell to about $315,000. Not bad!
Continue Reading Below
Here's what happens if you delay, though. If you put it off and start contributing next year, in 19 years, your money will have only grown to... $281,000. Wait two years, and 18 years of $5,000 investments until age 65 will turn into... almost $251,000. See what's amazing there? If you skip one $5,000 investment, you lose out on about $34,000 in growth. Skip $10,000 and your nest egg is some $64,000 poorer. That's because the $5,000 you contribute this year will have longer to grow than any subsequent $5,000 contribution. Your most powerful dollars are the ones you contribute now.
Dan Caplinger: Opening any type of IRA is a great way to save for retirement, but those who intend to use Roth IRAs get an extra benefit by getting their accounts opened as soon as possible. The sooner you open your Roth, the sooner you'll start earning the tax-free income and growth that Roths offer retirement savers.
For instance, consider Selena's example of someone who contributes $5,000 annually to a Roth from age 45 to age 65. If you use a traditional IRA, the $315,000 you might have at retirement would be subject to income tax whenever you withdrew money from your account. That effectively reduces the amount of usable retirement savings you have to spend on yourself.
With a Roth IRA, though, every penny of that $315,000 is yours to keep. That makes it even more important to start the clock on your Roth as soon as possible -- because every year you delay means tens of thousands of dollars less you'll have to live the retirement you've always dreamed of.
Roth IRAs aren't the perfect solution for everyone, with some high-income taxpayers not being eligible to contribute to a Roth IRA, and with others getting more benefit from taking an upfront tax deduction and paying tax in retirement. Nevertheless, for many in low tax brackets right now, it's hard to beat the benefit of opening a Roth IRA right now.
Matt Frankel: There is a long list of reasons to open an IRA, but perhaps the most compelling is that Social Security and your 401(k) might not be enough to fund the retirement of your dreams.
Experts generally say that you'll need about 80% of your pre-retirement income to really enjoy a comfortable retirement. So, if you make $100,000 per year, this means $80,000 per year from your retirement savings. And bear in mind that you'll need to adjust this number upward to account for cost-of-living increases as the years go on.
For someone of that income level, Social Security should be good for a little more than $30,000 per year, assuming no cuts will be made before you retire -- a pretty lofty assumption. And, even if you manage to build up $1 million in your 401(k), according to the "4% rule of retirement" many experts like to use, you can expect to draw about $40,000 per year from it. This leaves you with a shortfall of $10,000.
In a nutshell, your IRA account can help bridge the gap between your other means of retirement income and how much money you'll actually need in retirement. In my opinion, this is the best reason for opening an IRA right now.
The article 3 Biggest Reasons to Open an IRA Today originally appeared on Fool.com.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.