The Individual Retirement Account, or IRA, is a powerful wealth-building tool hidden in the tax code that most Americans don’t know about. This special investment account allows you to save and invest in tax-advantaged retirement, allowing your money to grow faster. IRAs can make you a millionaire by the time you retire if you make smart contributions and invest wisely.
Here’s what you should know about IRA, including contribution limits, tax benefits and how to turn a small investment into a seven-figure nest egg.
Should You Open a Traditional or Roth IRA?
Contribution limits are set on IRAs each year. For 2023, you can contribute up to $6,500 per year, plus an additional $1,000 as a “catch-up contribution” if you are over age 50. And you have time from the April 15 tax date for the previous year to contribute.
With the same $1,000 catch-up, the limit is up to $7,000 in 2024. If you actively work in a job or business, you are eligible.
Can You Contribute if You Already Have a 401(k)?
You can open an IRA in addition to a 401(k) or workplace retirement account. But your ability to deduct Traditional IRA contributions may be limited if you or your spouse is on a workplace retirement plan.
Roth IRA income limits allow all tax filers eligibility, regardless of workplace retirement plan coverage. To make the full Roth contribution for 2024, your single income must be less than $146,000 or joint income less than $230,000.
Unique Benefits of IRAs
IRAs are more flexible than 401(k)s. You can’t borrow from IRA funds, but you can, up to $10,000 with no penalty to buy your first home. You can fund college or graduate education for yourself, your spouse, children or grandchildren with IRA funds in a tax-free and penalty-free manner.
How Your IRA Could Make You a Millionaire
Once funded, IRAs can invest in assets, whether stocks, bonds, mutual funds or ETFs. An annual IRA contribution of $7,000 could be worth more than $1.15 million over 30 years, as the average stock market return is about 10% per year!
It is important to invest and contribute periodically for long-term growth. Automated robo-advisors are a good option if you want to avoid choosing investments.