(BPT) - Americans know tax day is the deadline to file income tax returns with the federal government. But tax day is also another important deadline: workers have until tax day to make contributions to their individual retirement accounts (IRAs) for the previous year.
IRA contributions grow on a tax-deferred basis, meaning savers pay no tax until they withdraw their funds in retirement. There is another immediate incentive: for those who qualify, based on income and access to a workplace retirement plan, IRA contributions may also be tax-deductible, reducing workers' taxable income for the previous year. That's a win-win for many savers. Here are three reasons why you should consider an IRA:
1. Traditional IRAs can help ensure that everyone who earns taxable income, regardless of how much they earn, has access to tax incentives to save for retirement. Tax deferral helps workers build a nest egg over time by postponing taxes on savings until retirement. Contributing in an IRA is a great way to invest and build a retirement account over time.
2. The flexible structure of IRAs provides Americans with choices when it comes to their retirement savings. With an IRA, savers decide how much they want to contribute (up to a limit) and when. IRA contributions can be made at any time during the tax year, or until tax day the year after that. Savers 49 and younger can contribute up to $5,500 to their IRA each year; those 50 or older can contribute an additional $1,000. Those who meet certain qualifications may decide instead to open a Roth IRA, where savers make contributions with after-tax dollars (unlike a traditional IRA, where contributions are in pre-tax dollars) and pay no taxes when they withdraw in retirement.
3. Workers can easily roll over their employer-sponsored 401(k) assets into an IRA upon leaving a job. Workers who simply cash out their 401(k) have to pay taxes on their assets, and may have to pay penalty fees for early withdrawal. They can avoid these taxes and fees by rolling over 401(k) assets into an IRA, which is not tied to an employer.
Today, Americans are increasingly using IRAs to grow and maintain their savings for retirement. As of 2014, almost 42 million U.S. households reported that they owned IRAs, according to the Annual Mutual Fund Shareholder Tracking Survey published by the Investment Company Institute (ICI). Other research from ICI shows that Americans have $7.3 trillion tucked away in these accounts.
IRAs are just one piece of our multi-layered retirement-savings system. The various pieces of the system - including IRAs, employer-provided defined benefit and defined contribution plans, personal savings, and Social Security - are working well for millions of workers. When IRA assets are combined with all other assets set aside for retirement, research shows that Americans have set aside a record $24.2 trillion for their golden years, with successive generations of near-retirees holding higher wealth than the previous generation.
ICI research also shows that tax incentives - such as deferring taxes on savings until funds are withdrawn, as with traditional IRAs - help encourage Americans to save for retirement. 'The overwhelming majority of Americans do not want Washington lawmakers to change or limit these tax incentives,' says Paul Schott Stevens, president and CEO of ICI. 'When politicians ignore this clear message and propose new ways to limit retirement savings incentives, groups like ICI need voters' support in preventing such changes.'
To learn more about IRAs and the importance of protecting tax incentives for retirement saving, visit www.ici.org/retirement.