Most financial experts recommend you start contributing to an individual retirement account, or IRA, as soon as you can comfortably fit retirement savings into your budget. But why is this? The answer is simple: the earlier you begin, the more time your contributions have to grow through the power of compounding.
Even if you can only contribute a small amount at first, consistently saving can help you build a stronger financial foundation for retirement.
What Is an IRA and Why Does It Matter?
An IRA is a tax-advantaged account with the sole purpose of saving and investing for retirement. There are two main types: a Traditional IRA and a Roth IRA.
With a Traditional IRA, you may be able to deduct your contributions from your taxable income, and you generally pay the taxes due when you withdraw the money in retirement. With a Roth IRA, you contribute money you’ve already paid taxes on, making qualified withdrawals in retirement tax-free.
With either type of IRA, the money you contribute can be invested in options such as stocks, bonds, mutual funds, and other investments, allowing your savings to grow over time.
When Is the Best Time to Start Contributing to an IRA?
How do you know if your finances are ready for a steady contribution toward your retirement? Keep these guidelines in mind:
- Sooner versus later: The sooner you begin, the more time your money has to grow through compounding, no matter how small. It’s never too late to start contributing, even a few years’ worth of growth can be helpful.
- When you have earned income: Generally, you do need taxable compensation to contribute to an IRA. If you're working and have money left after covering essential expenses, consider putting some toward retirement.
- After establishing an emergency fund: Before focusing heavily on retirement savings, make sure you have some cash set aside for unexpected expenses, so you’re not tapping into retirement savings when an emergency arises.
- Once your high-interest debt is under control: If you're carrying high-interest credit card debt, paying it down may take priority over making larger IRA contributions.
- When you receive a raise or bonus: A higher income can create an opportunity to increase your retirement contributions without significantly changing your everyday budget.
Remember, even if you can't contribute much right now, a modest, consistent contribution can add up over time, and you can increase contributions as your financial situation improves.
Should You Contribute to an IRA Before Paying Off Debt?
It’s helpful to consider what type of debt you have before deciding if you should contribute to an IRA before that debt is paid off.
High-interest debt, such as credit card debt, is often worth prioritizing because the interest you pay can outweigh the potential growth of your investments. However, you may still want to contribute a small amount to an IRA while paying down debt, particularly if it helps you establish the habit of saving for retirement.
If you’re unsure if an IRA can fit into your retirement plans right now, or if you’re ready to get started, reach out to our customer service team to learn more.
