The Cost of Skipping Last Year’s IRA Contribution?
Let’s say Mary is 30 years old, employed, and has no workplace retirement plan available. It’s tax time, and Mary is trying to decide whether to make a contribution of $5,500 to her IRA for last year.
How much could that $5,500 be worth to Mary when she reaches age 65?
$58,721.
So Mary is really making a decision about nearly $59K, not $5500.
That calculation is from a recent article by Fidelity Investments, which makes historical assumptions about rate of return over that 35 year period.
Another potential benefit for Mary is the tax savings now because her IRA contribution effectively reduces her income by $5,500 and could save her $1375 in federal taxes now if she’s in the 25% marginal bracket. Because of the tax savings, the out-of-pocket amount for Mary’s contribution is only $4125.
So, for $4125 now, Mary could eventually get $58,721. Skipping that contribution now could really make a big difference later.
Important Note: contributions to a Roth IRA are not tax deductible, while contributions to a Traditional IRA may be deductible depending on the individual’s specific circumstances. Withdrawals from a Traditional IRA are taxable. The IRA contribution limit for 2013-2014 is $5500 for individuals under age 50. This illustration is of a general educational nature, not legal, tax or investment advice for a specific individual. Consult an attorney or tax professional regarding your situation. Investing involves risk of loss; investment performance is not guaranteed.