Can $6,000 IRA Contributions Really Add Up?

A wise person once said that humans tend to overestimate what they can accomplish in the short term and underestimate what they can accomplish in the long term.  This holds very true for IRA contributions, especially now that the annual contribution limit is $6,000 for 2021.  For those age 50 and above, the limit is $7,000.

 

IRAs offer a number of benefits:

  • Regular yearly savings
  • Potential tax-deductible contributions (depending on income levels and other retirement plan participation)
  • Tax-deferred compounding interest
  • Potential tax-free distributions (in the case of Roth IRAs)

 

It can be easy to put off or fail to make contributions to an IRA.  Retirement may seem like a long way off and $6,000 may not sound like a lot of money to save.  But look at how these contributions can accumulate.

 

Year

Total Contributions IRA Value Savings Account Value
1 $6,000 $6,000 $6,000
2 $12,000 $12,360 $12,259
3 $18,000 $19,102 $18,789
4 $24,000 $26,248 $25,600
5 $30,000 $33,823 $32,706
6 $36,000 $41,852 $40,119
7 $42,000 $50,363 $47,852
8 $48,000 $59,385 $55,920
9 $54,000 $68,948 $64,335
10 $60,000 $79,085 $73,115
15 $90,000 $139,656 $123,039
20 $120,000 $220,714 $184,719
30 $180,000 $474,349 $355,075
Taxes Due* -$82,418 None
Net After Tax   $391,931 $355,075

 

* Assumes contributions to the IRA were not tax-deductible and therefore taxes are not calculated on the total amount of the nondeductible contributions when received.  An earnings rate of 6% was used.  A tax rate of 28% was applied to the earnings in the savings account.

 

No one can accurately predict what level of earnings you may earn on your investments.  It may be difficult to foresee what the future tax laws will be.  However, using IRAs as part of your retirement planning strategy can help you have the type of financially secure retirement you desire.

**This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

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