The new year often inspires people to set resolutions and goals, and finances are no exception. As you review your budget and investment strategy, don’t forget to revisit your retirement plan and goals. Maximizing contributions to an IRA, if possible, is a smart move, and even if you missed the boat last year, there’s still a chance to reach your 2023 contribution limits in 2024.
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Understanding the Significance of Tax Day for IRAs
While Tax Day may seem like just a day to file your federal income tax returns, it holds greater importance for your IRA contributions. The deadline to make contributions for the previous tax year is April 15. This means that you have until April 15, 2024 to maximize your IRA contributions for the tax year 2023, providing an extra three and a half months for strategic contributions.
Remember, you can make contributions to an IRA for a given year starting on Jan. 1 of that year, not just until Tax Day. This allows you to contribute towards both your 2023 and 2024 IRA thresholds from Jan. 1, 2024 to April 15, 2024.
The Power of Long-Term Investments
For the tax year 2023, the maximum IRA contribution is $6,500 ($7,500 if you’re 50 or older). These seemingly modest amounts can have a significant impact over time thanks to compounding earnings. A single investment can grow substantially over different time spans, doubling in value with consistent 10% annual returns.
| Years Invested | Initial $6,500 Investment | Initial $7,500 Investment |
|---|---|---|
| 10 | $16,800 | $19,400 |
| 15 | $27,100 | $31,300 |
| 20 | $43,700 | $50,400 |
| 25 | $70,400 | $81,200 |
| 30 | $113,400 | $130,800 |
Calculations by author. Values rounded down to the nearest hundred.
A dollar invested today can yield substantial returns in the future. According to the Rule of 72, an investment could double in 10 years with 7.2% annual returns. Time is indeed a powerful force when it comes to investments.
Choosing the Right IRA for You
When it comes to IRAs, the choice between Roth and traditional depends on their tax advantages. Roth IRAs allow tax-free withdrawals in retirement, while traditional IRAs offer potential tax breaks upfront. Your choice should consider your future tax bracket based on your current financial status.
If you’re early in your career with expected earnings growth, a Roth IRA may be beneficial, as you can pay taxes now and enjoy tax-free withdrawals later. On the other hand, for individuals in their peak earning years, a traditional IRA might offer better benefits, allowing a tax break upfront and lower taxes in retirement.
Regardless of your decision, making contributions before Tax Day could significantly impact your future financial well-being.