How an IRA Account Helps You Today, and Not Just in Retirement

If you've been putting off opening an IRA account because retirement is still years away, there's one big reason you're making a mistake.

May 18, 2014 at 2:58PM


If you've been hearing rumors about your neighbor or co-worker's IRA account, then let me set the record straight: They're probably true. In short, there are few things as advantageous to the average American as an individual retirement account sanctioned by the IRS.

Why you should have an IRA today
In short, virtually every working American would benefit from having an IRA. And the best news is that they're easy to understand and can increase your tax refund by more than $1,000 a year. For fear of getting ahead of ourselves, however, let's start with the basics.

IRA stands for "individual retirement account." In many ways these are indistinguishable from a standard savings account. Most banks and discount brokerages offer them. Their purpose is to store your money until future use. And, within predefined limits, they can be added to at your leisure.


The biggest difference is that once money is deposited into the account it can't be withdrawn absent a stiff penalty until you turn 59.5 years old. In this respect, an IRA serves as a way to gently cajole Americans into preparing for retirement.

Now, just to be clear, there are two general types of IRAs. The first is a Roth IRA, which allows your contributions to grow tax-free even once you withdraw them -- this, of course, is assuming you invest the funds. And the second is a traditional IRA, which is what we're interested in here.

A traditional IRA is particularly attractive because it allows you to deduct the contributions from your income taxes in the current year up to a maximum of $5,500 -- an important caveat is that the deduction is gradually phased out for single individuals who earn more than $112,000 and married people filing jointly with a combined income of $178,000.

An example of how an IRA can save you money
By way of example, let's assume Stephen earns $60,000 in taxable income working as a machine engineer in a local equipment factory. If he's single and doesn't qualify for any other credits or deductions, Stephen would end up owing the federal government $10,856 in income taxes.

By contrast, now let's assume Stephen contributes $5,500 to a traditional IRA, which is equal to the 2014 limit. By doing so, he reduces his taxable income to $54,500 and thereby drives his income tax liability down to $9,481.

Income Tax Line Item

Without IRA Contribution

With Traditional IRA Contribution of $5,500

Gross Income



Taxable Income



Tax Bill






Excluding the impact of unrelated credits and deductions. Source: author.

The immediate benefit to Stephen, in other words, is a $1,375 cut to his tax bill; another way to look at this is that it adds a comparable amount to your refund if taxes are automatically withheld from your paycheck.

Taking this one step further, moreover, if you compare the $1,375 figure to the amount set aside -- i.e., $5,500 -- then Stephen effectively achieved a single-year return on investment of 25%, or nearly triple the long-run average of the S&P 500 (SNPINDEX:^GSPC).

The point here is that an IRA account -- and, specifically, a traditional IRA -- is effectively free money. Or, at least, it's the closest thing to free money that most of us are likely to ever come across.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

John Maxfield and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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