Do I Really Need an IRA?

If you haven't yet tapped the power of IRAs, now might just be the time to improve your financial outlook. Even if retirement is a long ways off, time is truly ticking on your window for taking advantage of the wonders of compound interest.

Let's look at a simple example to clarify how small changes early on in your investing life can mean big differences later on. If you start down the investing path at a young age, say 30 years before you expect to retire, your money will be working for you for a long time. If you invest just $4,000 a year for 30 years in a Roth IRA that earns 8% annually, you will have more than $1.1 million from just those yearly $4,000 contributions. Not to mention that money would be completely tax free! Now, if you were to make the same investment in an account that is taxed at the normal rate, you would end up with "only" $800,000, which is 25% less than you receive with the Roth IRA.

Given this evident benefit, it wouldn't be a bad idea to start making the maximum contribution to an IRA. To set one up, you simply have to have taxable income. As long as it doesn't exceed $110,000 (or $160,000 for couples), you can contribute up to $4,000 per year. In fact, if you forgot to do it last year, you can still put money into an IRA all the way up to the date you submit your taxes for the previous year. Now there really is no excuse!

Saving for retirement with a Roth IRA is much more flexible other options like a 401(k), or even a traditional IRA. If you need to take money out of your account, you can do so without paying a penalty (you just pay tax on it if you're taking out earnings). You have a high degree of control over your fund, so you can choose to put your money into stocks, bonds, mutual funds, or other investments. You can also take money out for things like buying a house, paying for major medical expenses, and higher education. An IRA can even be used as an investment vehicle for providing for your children's education- a fund specifically for that purpose is better, but it's nice to know that you can always depend on your IRA if you need to.

You may be thinking that someday you might make more than the maximum income that makes you eligible for an IRA. Nonetheless, you can still contribute every year until then- and your earnings will grow tax free until the day you need them. You may also be thinking that you don't have the extra cash to be investing. This can be quite a challenge, but any sacrifice that you make now will pay off in the form of a reward many times its size in the future. Such is the power of smart IRA investing.