We Fools tend to be big fans of individual retirement arrangements, or IRAs, as they offer a variety of tax benefits that can go a long way toward helping you reach your retirement goals. If you have yet to take the plunge and open an account, you could be missing out on some big benefits.
We asked three of our contributors to share a reason they think opening up an IRA right now could be a great financial decision. Read below to see if what they have to say will convince you to take action.
Andres Cardenal: Opening an IRA can be a great way to invest for retirement and obtain huge tax breaks from those investments. Depending on the specific kind of IRA account, you can save a lot of money in taxes, either on the money you contribute to the plan in a Roth IRA, or on the capital you withdraw in retirement with a traditional IRA. If an IRA is the right vehicle for you, the sooner you open an account, the better.
To begin with, time is a crucial consideration when investing for retirement. The longer your money is working for you in the market, the bigger the returns you obtain from that capital over the years. Time is money, especially when investing, so it makes little sense to postpone the decision to start investing for retirement.
Besides, there are limits to the amounts of money you can contribute to an IRA per year. In 2016, total annual contributions to both traditional and Roth IRAs can't be more than $5,500 if you are less than 50 years old, and $6,500 if you're older than that.
You want to contribute as much as possible to an IRA account in order to maximize the tax benefits, and since there are limits on annual contributions, starting as soon as you can is the smart way to do it.
Brian Feroldi: One big excuse that holds many people back from opening up an IRA is that they assume once money goes into the account, they won't be able to touch it prior to their retirement without paying a hefty penalty. If that worries you, you'll be glad to know that those early withdrawal rules do not apply to Roth IRAs, which is a big reason I'm such a fan of this type of retirement account.
With a Roth IRA, you're able to withdraw any money you contribute -- but not any capital gains or dividends -- at any time and for any reason, penalty free. This feature could be especially helpful down the road if you had a sudden need for cash. In a way, this allows a Roth IRA to act as an emergency fund and a retirement fund, which makes it the best of both worlds.
Better yet, while that's a terrific feature, my favorite reason to open a Roth IRA is that all the future capital gains and dividends the account generates over time are yours to keep tax-free as long as you don't touch it until after you retire. That's a huge benefit over other retirement funds, like a 401k or traditional IRA, since if you want to access money in those accounts after you retire, you'll still have to pay taxes on the gains.
With many features to offer, it's a bit of a shame Roth IRAs aren't options for everybody, as there are income limits you must be under in order to be able to contribute. For example, in 2015, your modified adjusted gross income (AGI) has to be less than $116,000 if you are single, or less than $183,000 if you are married filing jointly to be able to contribute.
It's also worth pointing out that contributions to Roth IRAs are made on an after-tax basis, so you'll score an upfront tax deduction if you decide to contribute to a Roth the same way you would with other retirement accounts.
Still, the tax-free growth and ability to access your money at any time are huge advantages, so if you've put off opening an IRA for this reason, you're out of excuses.
Jason Hall: For me the biggest reason to open an IRA today is a simple one: Every day you put it off is a day you've wasted. The reality is, individual investors don't have a lot of advantages, but the one we do have is time. Think about it this way:
The S&P 500, a relatively good proxy for measuring the stock market's long-term performance, has averaged around 10% annualized returns. That's good for doubling your investment about every eight years. So, if you invested $5,500 (the max IRA contribution for 2016) in an IRA today, one could reasonably expect that to be worth $14,000 in a decade.
In 20 years, that $5,500 could be worth $37,000. 30 years? How about almost $96,000?
Let's look at it another way. If you continue putting it off, it will cost you a lot more money down the road. Every $1,000 you delay saving for retirement by five years will take $1,600 to replace. Wait a decade, and you'll need to put $2,600 aside to replace the skipped savings and compounded returns.
Put it off for 20 years, and every $1,000 you didn't put in an IRA when you were younger will take $6,700 to replace.
Bottom line: Time is either your ally or your enemy. Open an IRA today, and put time to work on your side.
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