Last week we looked at 401(k) maintenance and how your choices can affect your retirement accounts. But investing in a 401(k) is not the only way for people to save for retirement. Depending on your age, you may be able to save significant amounts in an Individual Retirement Account or IRA. We will look at how investing the maximum in an IRA for Generation X, Millennials and Gen Z can leave you with significant funds outside your workplace retirement accounts. For these issues, you may wish to seek the advice of a Registered Financial Consultant (RFC) for assistance.
What is an IRA?
IRA’s are retirement vehicles that are available to most people who have earned income for tax purposes. Earned income is considered wages that are earned where you receive a W-2, a 1099 or have self-employment income to report on your taxes. It is not income earned by rental properties, dividends, or interest. So why is it that more people who have earned income not have IRA’s?
Many people decide not to have an IRA outside of their workplace accounts due to the fact they do not know where to begin or what to invest in. But this issue can be solved by finding a fee-only RFC to provide financial advice. And an RFC can explain the guidelines on income limitations and IRA’s as well. The income limitations are different for ROTH IRA’s, where your contributions are already taxes and all earnings are tax-free when withdrawn, and Traditional IRA’s, where contributions can be a tax deduction in the year they are made.
First, we will take a minute to look at the amounts you can contribute to an IRA. For those under age 50 for 2019 you are allowed to contribute up to $6,000 and for those over age 50, you are allowed an extra $1,000 for a contribution limit of $7,000. If you do not have earned an income of these limits, you are limited to contribute to what your earned income was. So, now that we know what we are allowed to contribute, let us look at the income limitations. For a Traditional IRA you may deduct your contributions for single filers on your taxes if your income is less than $64,000 and for incomes between $64,001 and $74,000 the deduction is phased out and for incomes over $74,001. These amounts for married filing jointly are full deductions if your income is less than $103,000 and phased out for incomes between $103,001 and $123,000 and non-deductible for incomes over $123,001. For ROTH IRA’s the income limitations are different and are as follows. For individuals who earn less than $122,000 they may make the full contribution, it is reduced for incomes between $122,001 and $137,000 and phased out completely for incomes over $137,001. For tax filers who file married joint returns, they can contribute the full amount up to $193,000 and see the phased-out contributions between $193,001 and $203,000 and none allowed with incomes over $203,001.
What this means for Gen X
Are Gen X are people born between 1965 and 1979, meaning they are between the ages of 40 and 54. So what does this mean for Gen X’ers who want to start saving for retirement in an IRA? First, we will look at what saving the maximum would generate for someone who earns a modest 7.5% annual return on their investment who contributes the maximum allowed by law and also meets the income restrictions. We will look at a 40 and 50-year-old in these two examples to see what they can save in 19 and nine years respectively. A 40-year-old can expect their IRA to end with approximately $260,550 when contributing the maximums allowed for 2019. And a 50-year-old would amass approximately $85,600. As I have always stated the earlier, you start saving, the better off you are an, the more your money will compound. Now let us look at how Millennials will do when they invest in an IRA.
What it means for Millennials
Millennials are people born between 1980 and 1994, meaning they are between the ages of 25 and 39 now providing them with many more years to compound their investments in an IRA. Here we will use the same 7.5% return on our investments, but now we are compound from ages 25 and 35 for a total of 34 years and 24 years respectively. Again, we will use the contribution limits as established for 2019 and assume we meet the income limitations as well. A 25-year-old would see they investments grow to approximately $926,230 and a 35-year-old would see a portfolio value of approximately $388,000. As you can clearly see the extra ten years makes a huge difference in the ending values of your portfolio. Now we will look at what happens for those in Generation Z.
What it means for Gen Z
Gen Z are those born between 1995 and 2015 or ages 4 through 24. Now we know the younger Gen Z’ers will not have earned income, but those age 15 or 20 might very well have enough to save the maximum contributions in earned income. So, what will their portfolios look like if they too earn our 7.5% return, but now they will grow over 44 years and 39 years. A 15-year-old saving the 2019 maximums would amass an astonishing $1,993,000 and a 20-year-old will have an impressive $1,275,000. What a difference five and ten years can make in one’s overall portfolio returns. If you are a Millennial or Gen X’er and have a Gen Z as a child, you can now see the importance of investing for their retirement now and not waiting until they are out of college.
IRA’s, are worth it?
As we have looked at the hard numbers behind each generation starting to invest in an IRA at different ages, you can see that the earlier you start, the better off you will be. Yes, Gen X is behind the eight ball if they are starting but remember, it is never too late to invest in yourself for your retirement. The key is not to wait any longer and get started now not to lose any more valuable time to compound your funds.
If you have any questions or need any assistance, reach out to me here or by email at kirk@kgmeyerpc.com. If you do not wish to contact me at least reach out to another RFC or qualified financial planner in your area and get started saving today. To join our email mailing list, please fill out the form below.
