The value of most IRA accounts is pitifully low and the reason is that most people keep making the same four silly mistakes.
This article published with permission from InvestmentU.com.
If you have an IRA — and you certainly should have one, given their potential as a vehicle for tax-advantaged retirement savings — then you should know that the value of most IRA accounts is pitifully low.
In fact, according to the Workers Retirement Institute, the average value of an IRA held by U.S. workers is less than $28,000.
The reason: People keep making the same four silly mistakes.
1. Not maxing out IRA contribution limits
Maxing out your contributions can mean the difference of hundreds of thousands of dollars when you reach retirement. For a SIMPLE IRA, the maximum contribution amounts are $5,500 (if you’re under 50) and $6,500 (if you’re 50 or older).
Consider the example of someone who starts contributing at age 21 and wants to retire at age 60. That amounts to 29 contributions of $5,500 and 10 contributions of $6,500.
Assuming a modest 5% annual growth in the value of the invested funds, this person’s IRA would be worth $677,000 by the time he retires. On the other hand, if the individual contributes the average IRA contribution of $3,665 yearly, his take at age 60 would be about $439,000 — a difference of $238,000.
Consider, also, that a Traditional IRA holder who isn’t maxing out his or her contribution is diminishing his own tax benefit. His taxable income will increase by whatever amount below the maximum he contributes.
2. Withdrawing funds too soon
The IRS imposes huge penalties on anyone who takes money out of an IRA before reaching the age of 59-and-a-half. Although there are certain exceptions to this, simply needing the money for ordinary expenses is not one of them.
But even aside from the IRS penalties, withdrawing the money too soon can cost you a fortune. The example above demonstrates why: The IRA holder would be legally entitled to begin withdrawing funds at age 60, but $677,000 isn’t likely to last the rest of his life. (The average American life expectancy is 76 for men and 81 women, and it increases yearly.)
But he’d boost the size of his account by a third in just five years, to about $900,000, simply by continuing to contribute the full amount each year rather than withdrawing from it. And you can double that amount for a married couple with both spouses contributing the maximum for the same amount of time.
In fact, he’d realize most of those gains even if he stops contributing. His account would be worth $864,000 five years later, just by leaving it alone, assuming a 5% annual return on his investments.
If you’re reading this article and you haven’t started an IRA yet, get cracking.
You can set up an IRA at most online investment firms in about 10 minutes. Throw in another 10 minutes to set up regular transfers from your checking or savings account.
The longer you wait, the less you’ll have when you hit retirement.
Perhaps the best advice is the old saying, “spend what is left after saving, instead of saving what is left after spending.”
I just turned 60, and I’m still contributing. I’ve been doing so since the age of 21. It was hard at first, but now it’s easy.
4. Thinking the contribution deadline has passed
Many individuals think the deadline for IRA contributions is Dec. 31. Wrong: It’s actually April 15 of the following year for which taxes are due.
That gives most laggards an additional 105 days to make their contribution. In addition, the IRS allows you to deposit last year’s tax refund (if you received one) directly into your IRA.
Dave Fessler is a senior analyst at InvestmentU.com. See more articles by Dave here.
The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.