Maximizing your IRA contributions

Personal retirement savings have grown in importance as the future of Social Security and traditional corporate pensions have become uncertain. In fact, you may want to regard Social Security as a bonus, not a mainstay, when developing your retirement plan. Thus, maximizing the contributions to your IRA becomes a greater priority every year.

It pays to maximize. While saving any amount toward your retirement is beneficial, it pays to contribute the maximum amount to your IRA every year over the long term. For example, if you contribute $1,200 every year, with an annual, compounded return of 8%, over a 20-year period (2008–2027), you would save $59,307. On the other hand, if you contribute the current maximum amount of $5,000 (excluding catch-up contributions) in an IRA annually and keep the other factors the same, you would save $247,114, an increase of $187,807!¹

It pays to start early. Skipping just one year of contributions can make a big difference, too. For example, if you start saving at age 40, contribute $5,000 per year for 30 years, and attain an annual, compounded return of 8%, you would save over $611,000. If you begin saving just one year later, at age 41, you would save over $561,000 in 29 years — approximately $50,000 less!² This may delay your retirement.

Work toward building a solid nest egg for retirement by saving more and saving consistently in an IRA. Consider these strategies:

Save more with tax-deferred or tax-free compounding.
IRAs are a great way to save for retirement because they leverage tax-advantaged compounding — they generate earnings that are usually reinvested and, in turn, generate their own earnings.³ If you start early and save consistently over several decades, you may accumulate a generous amount of assets by retirement.

Contribute to more than one plan — For some, it makes sense to contribute to their employer-sponsored plan, like a 401(k) or 403(b), up to any matching limit, fully fund an IRA and then make any additional contributions to the employer plan. These savings vehicles can be used in varying combinations as your financial circumstances change, enabling you to leverage the benefits of both. Work with your tax advisor to help you understand how these IRA contributions could affect your taxes.

In addition, if you have a traditional IRA, some or all of your contributions may be deductible depending on your income, the amount of your contribution and whether you or your spouse are covered by an employer-sponsored retirement plan. Be sure to discuss this with your tax advisor to ensure you receive all of the deductions you deserve.

Consolidate 401(k) and small-balance IRA accounts — If you've changed jobs over the last few years, you may have multiple retirement accounts with former employers as well as a few small-balance IRAs. Not only is it an inconvenience to manage multiple accounts, you are likely paying multiple fees and your investments may lack diversification. Rolling over assets does not count toward your annual contribution amount — you can still make your annual contribution. By consolidating multiple accounts into a single IRA, you generally enhance control and diversification, while reducing paperwork, and may have reduced fees.⁴

Make non-deductible contributions — Some people may overlook contributing to a traditional IRA because they don't qualify for a tax deduction. However, if you have earned income, you can still make non-deductible contributions and your savings can still accumulate tax-deferred.

While non-deductible contributions are not taxed upon withdrawal, earnings on those contributions are taxable. You may not treat a partial distribution as coming entirely from the non-taxable portion of your IRA. Instead, you are required to treat a distribution as being attributable to both the taxable and non-taxable portions of your IRA on a prorate basis.

Open an account if you are self-employed — Entrepreneurs have many retirement savings choices including SIMPLE IRAs, SEP IRAs and Individual(k)s. In 2008, the deferral limit is $10,500 for SIMPLE IRAs and $15,500 for Individual(k)s. Both SIMPLE IRAs and Individual(k)s offer catch-up contributions, $2,500 for the SIMPLE IRA and $5,000 for the Individual(k). For SEP
IRAs, you may contribute up to $46,000 in 2008 or 25% of your compensation, whichever is less.

Whenever possible, avoid early withdrawals — Although withdrawing money from your IRA before you reach age 59½ is allowed, provided you pay any penalties and taxes due, it is not desirable. You risk your retirement savings goal and may never be able to replace the assets.

Pay yourself first with automatic contributions — Make sure you save before you spend with automatic deposits into your retirement account. Monthly, automatic withdrawals from your checking account to your IRA are easy and convenient and enable you to invest the same amount of money each month, regardless of what is happening in the stock market.

Help make your retirement dreams come true by maximizing your savings with an IRA. An Ameriprise financial advisor can help you learn more about IRAs, identify the options that best meet your needs and start a retirement program to help you plan for your goals. If you don’t have a financial advisor, contact us at 1-800-AMERIPRISE or search for an advisor in your area.