Why Invest in an IRA

From AIG Funds

The Power of Tax Deferral

One of the most important benefits of an IRA is the ability to grow your money tax-deferred. With IRAs, you won’t pay current income tax on any investment gains, until those earnings are withdrawn. The money that would otherwise go to pay taxes can stay in your account and continue to compound, giving you the opportunity to accumulate more wealth over time. Some IRAs even allow investors the ability to take tax-free income at retirement.

A Tax-Deferred IRA Can Grow Faster Than a Comparable Taxable Account

Let’s consider the case of Mike and Judy. Suppose Mike invests $5,000 each year in a tax-deferred Traditional IRA, while Judy contributes the same amount to a currently taxable investment. Both are in the 25% tax bracket and earn an annual return of 8%.

Since Judy has to pay taxes each year on her earnings, her investment only grows to $419,008 after 30 years, In contrast, Mikes’ retirement savings increases to a total of $611,729 over the same amount of time. That’s a difference of more than $192,700!

Additional Benefits of Investing in IRAs

Depending on which type of IRA you choose, you may also benefit from:

  • Tax deductions
  • A broad range of investment choices
  • Professional asset management
  • Tax-free income if you invest in a Roth IRA and meet certain requirements
  • Flexible withdrawals
  • Stretch capabilities

To find out more about the benefits of each IRA, please see the accompanying pages on Traditional IRAs, Roth IRAs, SEP IRAs and SIMPLE IRAs. You may also want to consult with your financial advisor to see which IRA is the most suitable option for you.