One Year’s IRA Contribution Can Really Make a Difference in Savings

(NewsUSA) – New data from Fidelity Investments found that more  than eight out of 10 Americans have cut back on discretionary purchases because of the recent economic crisis, and nearly half of respondents are now saving money. But many are unsure where to place the savings for the greatest benefit.

“After maximizing workplace savings plans and paying off credit card debt, investors should consider saving more for retirement using an Individual Retirement Account or IRA,” said John Ragnoni, senior vice president, Fidelity Investments. “Even though Americans are facing a challenging economic environment, it’s important to prepare for the future by making annual contributions.”

For example, an investor who makes a single contribution of $5,000 to a Roth IRA now could see that amount potentially grow to more than $53,000 in 35 years, assuming an annual rate of return of 7 percent.

Additionally, consolidating old workplace savings accounts at former employers into an IRA may offer the most compelling benefits for managing one’s retirement savings, including a broader range of investment choices.

This hypothetical example assumes the following: (1) one annual $5,000 Roth IRA contribution made on January 1 of the first year, and (2) an annual rate of return of 7 percent, and (3) no taxes on any earnings within the IRA. The ending values do not reflect taxes, fees or inflation. If they did, amounts would be lower. Earnings and pretax (deductible) contributions from a Traditional IRA are subject to taxes when withdrawn. Earnings distributed from Roth IRAs are income tax-free, provided certain requirements are met. IRA distributions before age 59 1/2 may also be subject to a 10 percent penalty. Systematic investing does not ensure a profit and does not protect against loss in a declining market.