If you're at the very beginning of your career – or still job surfing to figure out what career will be a good fit – thinking about retirement is totally ridiculous, right?
Wrong! In reality, the younger you are, the more you benefit from starting retirement savings in a tax-advantaged account like an individual retirement account (IRA). That’s because time is the most powerful element of long-term tax-deferred compounding.* And while you’re young, it’s working in your favor.
With compounding, your savings generate earnings, which are then reinvested to generate their own earnings. Tax-deferral means that you don’t have to pay taxes on the earnings in the account every year, as you would in a regular savings or investment account. If two accounts pay the same rate of return, but one is taxable and the other is tax-deferred, the money in the tax-deferred account will grow faster.
Enjoy the Ease and Flexibility of an IRA
If you’re new at your job, you may not qualify to contribute to a 401(k) or other employer-sponsored retirement plan. Or your employer may not offer one. But opening an IRA is simple, and doesn’t depend on where you work. You can open an IRA at Hanscom FCU and get a great start on retirement savings.
To open an IRA, you must have earned income or be married to a wage-earner. Annual contributions are limited to the following amounts or your taxable compensation for the year, whichever is less. (Those ages 50+ can make an additional $1,000 catch-up contribution.)**
Tax year 2015: contributions of up to $5,500 can be made until April 15, 2016.
Tax year 2016: contributions of up to $5,500 can be made Jan. 1, 2016, to April 15, 2017.
Get Started Today
Contact a service representative at Hanscom FCU today to open an account or learn more about how an IRA can benefit you. Call 800-656-4328 or visit www.hfcu.org/ira.
* Taxes will be due at ordinary income tax rates upon withdrawal from a traditional IRA. Withdrawals from a Roth IRA are tax-free if the account holder is at least age 59½ and has held the account for at least five years. Premature withdrawals from either a traditional or Roth IRA are subject to ordinary income tax and a 10% tax penalty.
** These limits are indexed to inflation for future years.
|Traditional IRA||Roth IRA|
|Contributions tax-deductible?||Sometimes – depends on participation in an employer plan and income if you or spouse participate||No|
|Distributions tax-free?||No||Yes, if account has been held at least 5 years and owner is 59½ or older|
The Advantage of Time
This hypothetical example illustrates the advantage of starting early to save for retirement.
Sally Sooner begins investing at age 25. She puts $200 a month in an account that earns an average annual return of 6%.* At age 65, her account balance is $398,298.
Larry Later puts off investing until he turns 40, then earns the same 6% return. He would have to invest $575** a month to accumulate the same amount as Sally by age 65. And he would end up investing $76,500 more.
* Rate of return is for illustration only and does not represent the return of any specific investment. Your returns will vary.
** This amount exceeds the annual contribution limit for IRAs.