Why an IRA?

Planning For A More Secure Retirement?

Why An IRA?

It’s a sad that over half the American population does not have enough money at retirement. They’re forced to return to work, usually for a low-paying job they wouldn’t even have considered during their prime earning years, or they must depend upon family for financial support. Either way, it’s an unfortunate way to spend what are supposed to be the best years of your life. But the simple fact is… if you plan ahead and begin saving early, you can retire more comfortably. Unfortunately though, most people don’t begin thinking about their retirement until it’s too late.

Planning for retirement is a tricky thing these days. It used to be that people could count on the value of their homes as an investment “nest-egg” for their retirement. In the past 20 years however, things have changed. And when real estate markets go “soft”, you just don’t seem to get what you expect for your home. In addition, the future of Social Security is so uncertain, that many of us don’t even include it in our retirement plans. Inflation is unpredictable. Baby boomers have seen consumer goods prices almost triple since the early 1970s. And with Corporate America “downsizing”, few people really depend on a corporate pension any more. Now for some good news: There’s a retirement vehicle designed to help us. It’s called an Individual Retirement Account (IRA). It’s a special retirement account that allows you to invest up to $2,000 a year and pay no taxes on the earnings until you retire. In addition, depending on your tax situation, you may also be able to deduct all or a portion of your IRA contribution from your taxable income- saving you taxes right now.  


How Can You Benefit With An IRA?

Because IRAs are Individual Retirement Accounts, the way they help you save for retirement depends on your “individual” employment and financial situation. No matter how much you make or what kind of pension plan you have at work, every wage earner under 70-1/2 can contribute to an IRA. And the interest earned plus any tax-deductible contributions you are eligible to make are completely tax deferred until you begin withdrawing money from your IRA at retirement (anytime between ages 59-1/2 and 70-1/2). The IRA Growth Chart below gives you an example of the substanatial earnings possible with an IRA investment.


IRA Growth Chart
Value of Your IRA After If You Contribute $ 500 /Year ($ 9.62 /Week If You Contribute $ 1,000 /Year ($ 19.23 /Week If You Contribute $ 2,000 /Year ($ 38.46 /Week
1 Year $ 535 $ 1,070 $ 2,140
5 Years $ 3,077 $ 6,153 $ 12,307
10 Years $ 7,392 $ 14,784 $ 29,567
20 Years $ 21,933 $ 43,856 $ 87,730
30 Years $ 50,537 $ 101,073 $ 202,146
40 Years $ 106,805 $ 213,609 $ 427,219

The above chart assumes an interest rate of 7% compounded annually. Interest rates on IRAs may fluctuate to some extent over the life of the account. Substantial penalties for early withdrawals.  


How Much Could Your IRA Save You?

How much can you save on your taxes by making contributions to an IRA? You can save on your present taxes by deducting eligible contributionsfrom your taxable income. By taking this deduction, you’ll defer taxes by putting them off until you retire (when you’ll most likely be in a lower income tax bracket). The chart below shows you how much you may be able to save now and each taxable year based on some contribution examples.  

IRA Tax Savings Chart
IRA Deductible Contribution Amount 15 % Tax Bracket Savings 28 % Tax Bracket Savings 35 % Tax Bracket Savings 38.5 % Tax Bracket Savings
$ 500 $ 75 $ 140 $ 175 $ 192
$ 1,000 $ 150 $ 280 $ 350 $ 385
$ 2,000 $ 300 $ 560 $ 700 $ 770
$ 2,250 $ 337 $ 630 $ 787 $ 866
$ 4,000 $ 600 $ 1,120 $ 1,400 $ 1,540

Note: To find out your maximum deductible contribution amount, see the IRA Deductible Contribution Chart below.


How Much Of Your IRA Contribution Is Deductible?

Certain limitations apply to the tax deductible status of IRA contributions for many wage owners.

However, the full deduction applies:

  • If you are not covered by an employer’s qualified pension plan, or
  • If you are covered by such a plan, but your Adjusted Gross Income (AGI) does not exceed $25,000 if filing singly, or $40,000 if married and filing jointly.While you may need to invest more annually in order to reach your retirement goal, the federal government allows this group of individuals to contribute and take the full deduction for the amount contributed to their IRA up to $2,000. A working spouse can also contribute up to $2,000. A non-working spouse can contribute up to $250 per year. (You can also make non-deductible contributions to your account, which along with their earnings are subject to taxes.

A partial deduction applies for those wage earners covered by an employer’s qualified pension plan with an AGI between:

  • $25,000 and $35,000 for Single taxpayers, or
  • $40,000 and $50,000 for Married taxpayers filing jointly.For these groups of taxpayers, the chart below will quickly show you some examples of the portion of your IRA contribution that will be tax deductible.

This chart is ONLY for individual’s COVERED by an employer’s qualified pension plan.


IRA Deductible Contribution Chart

SINGLE (Filing Singly) Adjusted Gross Income MARRIED (Joint Return) Adjusted Gross Income Your Maximum Deductible Contribution
$ 25,000 or less $ 40,000 or less $ 2,000
$ 27,500 $ 42,500 $ 1,500
$ 30,000 $ 45,000 $ 1,000
$ 32,500 $ 47,500 $ 500
$ 35,000 or more $ 50,000 or more None