Saving for Retirement? Give Yourself a “Raise”

Saving for Retirement? Give Yourself a “Raise”

Provided by RBC Wealth Management and the Neuman Wealth Management Group

        Wouldn’t it be nice if you could simply decide to increase your salary? While that may not always be possible, you can “give yourself a raise” in another key area of your finances — specifically, your retirement savings.

            Why? Because, for the first time since 2008, contribution limits have risen for one of the most popular retirement savings vehicles available: the IRA. You can now put in up to $5,500 per year (up from $5,000 in 2012) to a traditional or Roth IRA. If you’re 50 or older, you can put in an additional $1,000 per year above the new contribution limit. 

            And it’s a good idea to try to reach these contribution limits, considering the key benefits of an IRA:

• Tax advantages— A traditional IRA can provide tax-deferred growth of earnings, while a Roth IRA can grow tax-free, provided you’ve had your account for at least five years and you don’t start taking withdrawals until you’re at least 59-1/2.
• How valuable is this tax treatment? Here’s an illustration: If you put in $5,500 per year (the new IRA maximum) for 30 years to a hypothetical investment that earned 7% a year, but on which you paid taxes every year (at the 25% tax bracket), you’d end up with slightly over $401,000 — about $155,000 less than what you’d accumulate in an IRA. You will eventually have to pay taxes on your traditional IRA withdrawals, but, by the time you do, you might be in a lower tax bracket. And some of your contributions to a traditional IRA may be tax deductible, depending on your income. (Roth IRA contributions are not deductible.)
• Investment flexibility — You can fund your IRA with virtually any type of investment — mutual funds, stocks, bonds, certificates of deposit (CDs), U.S. Treasury securities and so on. And you don’t have to stick with one type of investment, either — within your IRA, you can create an investment mix that will help support your overall diversification needs.

            Still, even if you recognize the value of an IRA in helping you build resources for retirement, you might feel that investing $5,500 per year (or $6,500 if you’re 50 or older) is a daunting task. Fortunately, you don’t have to come up with a lump sum — and you may even gain some advantages by spreading out your payments. 

            Suppose, for example, you put $450 each month into the same investments in your IRA. The market price of these investments will probably fluctuate, as is the case for most investment vehicles. So, when their price is down, your $450 will buy more shares, and when the price rises, your $450 will buy fewer shares — in other words, you’ll automatically be a “smart shopper.” Over time, this strategy can result in lower per-share investment costs to you.

            But whether you put in a lump sum or make “installment” payments, do whatever you can to take advantage of the new, higher contribution limits for IRAs. You’ll be giving yourself a “raise” that can pay off when you retire.  

This article is provided by Eric St. Martin, a Senior Financial Associate at RBC Wealth Management in Stillwater, MN, and was prepared by or in cooperation with RBC Wealth Management.  The information included in this article is not intended to be used as the primary basis for making investment decisions nor should it be construed as a recommendation to buy or sell any specific security. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance. RBC Wealth Management does not provide tax or legal advice.  For additional information, please visit www.neumanwmgroup.com or call 651-430-5535.

RBC Wealth Management, a division of RBC Capital Markets LLC, Member NYSE/FINRA/SIPC

(03/13)