Could I benefit from contributing to an IRA? Key factors for consideration

When it comes to saving for retirement, you want to start saving as soon as you can. Investors looking back often regret not having ramped up savings earlier. For people who don’t have access to a 401(k) or 403(b) plan at work or who are looking to supplement their workplace plans with other investments, individual retirement accounts (IRAs) are an invaluable savings tool. You can’t finance your retirement, so taking advantage of the retirement saving vehicles available to you is important to securing your future.

IRAs are a popular choice for individuals looking to save for retirement, thanks to their tax advantages and flexibility. Generally, IRAs come in two flavors, Traditional and Roth. There are also options for self employed, small business owners. Consider your personal financial situation, retirement goals, and tax considerations to determine which option is best for you. If you fall into one or more of the six categories below, an IRA may be a good choice.

1. Individuals without employer-sponsored retirement plans

If you don’t have access to an employer-sponsored retirement plan, such as a 401(k), an IRA can be an excellent alternative. It provides a tax-advantaged way to save for retirement, allowing you to take control of your financial future. Even if you do have a 401(k), an IRA can be a valuable supplement to your retirement savings strategy.

2. Self-employed individuals and small business owners

For self-employed individuals and small business owners, IRAs offer a straightforward and flexible way to save for retirement. Options like the SEP-IRA or SIMPLE IRA are specifically designed for self-employed individuals and small businesses, providing higher contribution limits and potential tax benefits.

3. Young professionals

Young professionals who are just starting their careers can greatly benefit from investing in an IRA. By starting early, they can take advantage of the power of compounding over a longer period, potentially leading to significant growth in their retirement savings. Additionally, young professionals may be in a lower tax bracket, making a Roth IRA particularly attractive due to its potential tax-free growth and withdrawals.

4. Individuals seeking tax diversification

Investors looking to diversify their tax exposure in retirement may consider contributing to both Traditional and Roth IRAs. This strategy allows for a mix of taxable and tax-free income in retirement, providing flexibility in managing tax liabilities based on future tax rates and income needs.

5. Those planning for early retirement

Individuals planning to retire before the age of 59½ may find a Roth IRA beneficial. Since contributions (but not earnings) can be withdrawn tax- and penalty-free at any time, a Roth IRA can serve as a source of funds for early retirees who need access to their savings before traditional retirement age.

6. High-income earners

High-income earners who exceed the income limits for contributing directly to a Roth IRA might consider a “backdoor” Roth IRA strategy. This involves making nondeductible contributions to a Traditional IRA and then converting those funds to a Roth IRA, allowing them to benefit from potential tax-free growth and withdrawals. It’s important to understand that converting to a Roth may be a taxable event; therefore, we highly recommend consulting with a tax or financial professional.

Making consistent maximum contributions can build a significant nest egg over the course of decades of saving (see How regular contributions can compound into a substantial portfolio). There’s still time to contribute to or open an IRA for 2024 (up to $7,000, or $8,000 if you’re age 50 or older). Every year, you have a nearly 16-month period over which you can contribute to an IRA for that tax year. So, for 2024, you have until April 15, 2025, to make your IRA contribution.

Once you have made your 2024 contribution, you can focus on 2025. Contribution rates will remain the same in 2025.

If you’re able to make the full IRA contribution early in the year, it could have a significant impact on your savings over the long term. This is because early contributions give your IRA savings more time to benefit from potential investment growth.

Accelerating contributions by a few months may not seem like a big deal for one year, but it can have a significant impact over the long term. While investments are not guaranteed to grow every year, over time, you are likely to benefit from being invested longer. Of course, there may be reasons why you can’t contribute to your IRA at the start of every year and may choose to fund it throughout or later in the year. You may be able to schedule recurring, automatic transfers from your bank account to put your contributions on autopilot.

Individuals with earned income may have a choice between Traditional and Roth retirement accounts. But how do you choose which account to open? Evaluate the tax implications of contributing to a Traditional versus a Roth IRA. Consider your current tax bracket and how it might change in the future, because the way you put money into these accounts and how you take it out later is very different:

IRAs offer the flexibility of a wide range of investment options such as mutual and exchange-traded funds. You can assemble an allocation of investments to meet your needs or consider investments, such as target date solutions that are already diversified for you.

Individuals with earned income who meet IRS income limitations can contribute to a Roth IRA or make tax-deductible contributions to a Traditional IRA.

If you aren’t currently contributing to an IRA, or are contributing but not reaching the maximum limit, it may be a good time to open an IRA or increase your contributions. The key is to assess your personal financial situation, retirement goals, and tax considerations to determine if an IRA aligns with your long-term strategy.

Call 1-800-225-5132 to request a prospectus or summary prospectus; each includes investment objectives, risks, fees, expenses, and other information you should read and consider carefully before investing.