Why your annual IRA contribution is essential

IRAs are one of the most crucial components of a robust retirement savings plan. Most people know the value of a well-funded IRA, but not everyone maximizes what their IRA can do for them. For some, this means not investing in their IRA every year; for others, it might mean not maxing out their yearly contribution and leaving tax incentives on the table.

There is significant value in staying on top of yearly IRA contributions: you’ll be investing in your future, for starters, but you may also create immediate financial benefits for yourself come tax time as well. This article will cover some of the significant reasons why it’s important to stay on top of yearly IRA contributions, as well as strategies for doing so.

Take advantage of compounding interest

Opening and funding an IRA early in your career is a wise move for two major reasons: you’ll get a head start on building a nest egg for retirement, and you’ll also take advantage of the law of compounding interest. The longer you keep assets in an IRA, the longer that total has to reap dividends. These dividends get reinvested into your IRA over time, boosting the total amount of money in the account.

The basics of compounding interest are simple. When you open and fund an account that either offers a certain percentage of the total of money in the account, you’re earning interest. With IRAs, this interest takes the form of the appreciation if the total value of your holdings go up. If the interest goes down, depreciation. Therefore, compound interest is the idea that your total holdings, plus the interest they accrue, build your assets’ overall value.

As your assets increase in value, this higher sum’s interest creates additional value, resulting in a virtuous cycle. In other words, interest-bearing accounts add money to your account, which in turn makes future interest gains higher over time.

For IRAs, this means that you’ll prime yourself for more significant financial gains based on the amount of money you deposit. The higher your balance, the more you stand to gain when your investments increase in value. Even if you cannot contribute to an IRA or make large deposits regularly, keeping a balance in your account will still provide you with the benefits of compounding interest.

Seize tax benefits by maxing out your contributions

The benefits of an IRA aren’t solely focused on retirement. In fact, you may also be eligible for tax benefits when you fund your account every year. Individuals can deduct up to $6,000 from their taxable income by maximizing their IRA contributions (people who are 50 years or older can contribute $7,000 yearly). In other words, planning for your own retirement can shave money off your yearly tax bill: and the more you save, the more you get to deduct.

Every person is subject to IRA contribution limits. These limits include every IRA you might have, as well as those owned by a spouse if you file jointly. By maxing out your yearly IRA contributions, you prime yourself to benefit as much as possible from compounding interest. Better still, you can also deduct your IRA contributions from your annual income taxes.

Choose your own investments and strategy

Other retirement accounts are great—and vital—to have, but IRAs provide a customizability level that many others don’t. For starters, you can allocate your IRA funds to a variety of stocks and bonds, allowing you to take charge of how you shape your retirement investing strategy. Making the most of IRAs allows you to play a more direct role in where your money goes to grow, as 401(k) accounts only offer a slim selection of options comparatively. Plus, IRAs also make it easier to stay on track for your retirement goals as you control your asset allocation.

You can’t make up contributions later

If you want to take advantage of the benefits IRAs provide, you have a finite amount of time to do so every year. You can make catch-up contributions during the current tax year to count against the previous year if you haven’t maxed out the prior year’s contribution total, but no later. In other words, you can’t go back in time to reap tax benefits or compounding interest perks if you don’t keep on top of your yearly contributions.

This is why it’s crucial to keep on schedule with your annual IRA contributions. By missing out on the opportunity to max out every year, you risk losing out on tax benefits and compounding interest. Although you can make up the money later, you may find yourself trying to make two years’ worth of contributions in one shot, which might not be affordable. If you make steady, smaller contributions throughout the year, you’ll prime yourself to make sure you’re hitting your maximum contributions on time and in full.

A well-funded IRA is a pillar of any good retirement savings plan. Simply opening an IRA isn’t enough, though. You need to make sure you’re funding it often, adding as much to the account per year as possible, and that you’re taking control of the assets in the account to make the most of your investment portfolio. With the right strategy and mindset, you can ensure you’re not leaving money on the table. Better still, you can take a step in the right direction towards your retirement goals. A financial professional can help you craft a strategy that’s specific to your needs and guide you through the ins and outs of fully funding your IRA every year.