When you think of a retirement plan, what comes to mind?
The most popular retirement plan is the IRA account. IRA stands for Individual Retirement Arrangement, allowing individuals (as opposed to groups of people) to arrange for their retirement. Strictly speaking, then, an IRA is not an investment, but simply money the tax code treats differently than the rest of your earnings.
It helps to think of an IRA as a bucket. Put $3,000 into that bucket, and the IRS allows you to use that money to buy investments. As long as you keep the money in the bucket for the required length of time, you won’t have to pay taxes on the profits you earn. Because you paid no taxes on the growth of that money, it’s referred to as tax-deferred growth.
Money that is not taxed grows quicker than money that is, so tax-deferred growth is a real benefit. The idea of an IRA is to take money that ordinarily is not sheltered from taxes and shelter it. If you keep the investment until retirement, that too becomes tax-deferred. Normally, the interest is all that’s sheltered, unless you wait until retirement.
The IRS allows contributions to an IRA to shelter money from taxes up until April 15th. But the financially savvy member makes his or her IRA contribution as early in the year as possible.
Why?
With an IRA, you are saving money, not spending money. The additional interest you earn over the year can really add up. According to Ric Edelman, author of The Truth About Money, you will have $53,000 more over 30 years by opening your IRA account on January 1 instead of April 15. His calculation, however, is based on an investment that gives you a 10 percent return. But, even at a lower rate, you’re still looking at a significant chunk of change. Put the money away NOW and reap increased benefits at retirement.