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How to Make Your IRA Grow

Original post by Diane Perez of Demand Media

Americans have several options when saving for retirement. Many choose to open an individual retirement account (IRA) for the benefits it offers. You can contribute to an IRA even if your employer offers a pension plan, although part of your contribution may not be tax-deductible. You can have as many IRAs as you want, but your combined deposits cannot exceed the maximum yearly contribution. The maximum amount as of the publish date is $5,000 for people under 50 years of age, and $6,000 for participants over 50.

Step 1

Choose a plan that uses before-tax dollars, known as a simple IRA. This puts more money to work for you, as the government does not tax your earnings until you start taking distributions at retirement. For example, if you arrange for the payroll department to deduct 5 percent of your pay and deposit it in a simple IRA at the credit union, they will take the 5 percent from the top, before deductions, such as for taxes, social security. If you are 25 years old and work until age 65, you will enjoy 40 years of compounded interest on before-tax earnings.

Step 2

Sign up for an employer-sponsored IRA if your company matches contributions. Some businesses match a percentage, usually up to 5 percent of your pay. For example, if you allocate 3 percent of your pay for a simple IRA, then the company also contributes 3 percent of its funds into your IRA. This doubles the money you are saving for retirement. Your employer may make its contribution at the end of the year.

Step 3

Contribute the maximum amount allowed each year to make your IRA grow quickly. As a simple example, if one person contributes $1,000 per year but another person contributes the current maximum of $5,000 per year, without counting interest or employer contributions, the second person will be way ahead at retirement. At the end of 40 years, the first person has $40,000 while the second person has $200,000. The difference is even starker if interest and employer contributions double or triple the IRA balance. The second person will have a more comfortable old age.

Step 4

Consult with a professional to develop an investment strategy for your IRA. Some plans invest aggressively to grow your money faster. However, investments that pay higher returns do so because they are riskier. You could lose some of your money. Finance professionals help you to spread the risk in a manner that meets your goals and level of comfort. They can inform you of specialized IRAs, such as those that invest exclusively in green companies, if this is something you prefer. The law prohibits some investments within IRAs, such as collectibles, according to the Internal Revenue Service (IRS) website.

                   

References

About the Author

Diane Perez is a writer who contributes to various websites, specializing in gardening and business topics, and creates sales copy for private clients. Perez holds a Bachelor of Science in education from the University of Miami.

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