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The biggest difference is that once money is deposited into the account it can't be withdrawn absent a stiff penalty until you turn 59.5 years old.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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers