3 Reasons Now Is the Best Time to Open an IRA

By Markets Fool.com

Continue Reading Below

Source: 401kcalculator.org via Flickr.

If you haven't yet started saving for your retirement in an IRA, you're missing out on one of the best ways to ensure your financial security later in life. Fortunately, now is an excellent time to get started. Here are three reasons you should open your first IRA today.

1. You could get a nice tax break
There are two types of IRA accounts to choose from: traditional and Roth. And while both accounts have excellent tax advantages, there are some differences you should know about.

If you want a more immediate tax benefit, you may be able to deduct contributions to a traditional IRA from your income. To be eligible for a deduction, you either have to earn less than a certain amount or be ineligible to participate in a retirement plan at work. The income limits vary based on your marital status and whether your spouse can participate in a plan at work. The IRS lays out how your modified adjust gross income affects your potential deduction if you're covered by a plan at work and if you're not covered by a plan at work.

With a Roth IRA, your contributions are not tax-deductible, but any qualified withdrawals you make once you retire are tax-free. And with both account types, your money compounds on a tax-deferred basis, so you won't have to worry about paying taxes on capital gains or dividends each year.

Continue Reading Below

2. If you start now, you can contribute twice the annual limit
One of the best reasons you should consider starting immediately is the way the IRS structures its contribution rules.

You're allowed to contribute $5,500 to an IRA ($6,500 if you're over 50) for the 2014 and 2015 tax years. And you can make contributions for the previous year until the April 15 tax deadline. In other words, even though it's 2015, you can make a contribution right now, and the IRS can count it toward your 2014 contribution limit.

When making a contribution to your IRA, you'll have the option to select either 2014 or 2015 as the tax year of record for the contribution. So if you get started soon, you could theoretically contribute twice the annual limit to your account during 2015. If you're a little late getting started, this can go a long way toward getting you caught up.

3. It's always a good time to start
The most powerful weapon investors have at their disposal is time. There is no more certain path to long-term wealth than solid investments compounded over long periods of time. The longer you have, the more incredible the compounding effect is.

Consider that over the past 20 years, the S&P 500 has averaged total returns of about 9.5% per year. If you were to contribute $5,500 to an IRA every year and simply match the market's average return, your account could grow to about $100,000 after 10 years, even though you've contributed only $55,000.

After 20 years, your $110,000 in contributions could produce an account value of more than $330,000. And if you have a 30-year time frame, your $165,000 in total contributions could grow to more than $900,000. Here's a chart to illustrate the degree to which time can affect your investment performance.

Years Total Contributions Account Balance at 9.5% Annual Growth
10 $55,000 $99,211
15 $82,500 $189,428
20 $110,000 $331,451
25 $137,500 $555,029
30 $165,000 $906,993
35 $192,500 $1,461,069

To make the most of your investments, you need to give them as much time to grow as possible. The best way to do that is to get started right now.

The article 3 Reasons Now Is the Best Time to Open an IRA originally appeared on Fool.com.

Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.