Getting the Most from Your IRA

A traditional IRA could be the only qualified retirement plan you have, or it can supplement other types of retirement accounts. IRAs are simple to set up and can provide an easy way to save for retirement.

Whether you are using an IRA as your sole qualified retirement account or as a supplement to another program, such as a 401(k) plan, a few tips can help you get the most from your account.

Timing is Everything

Taxpayers typically have until their taxes are due to fund a traditional IRA or Roth IRA for the previous tax year. For example, taxes are due on April 15, 2014 for income earned in 2013. You have until April 15, 2014 to fund your IRA and claim a deduction against income earned in 2013.

However, the earliest you can fund an IRA for 2013 income is January 1, 2013. That is fifteen and one-half months before the latest funding date of April 15, 2014.

If your IRA earned eight percent, funding it on January 1, 2013 instead of April 15, 2014 could mean a significant difference in its value over time. For example:

IRA Contribution
January 1, 2013
IRA Contribution
April 15, 2014
Amount you contribute
Balance on Dec. 31, 2013
Assumes a hypothetical 8% annual return, compounded monthly. This example is for illustration only and does not predict or guarantee the
performance of any Wells Fargo Funds

The longer your money stays invested, the harder it can work for you.

Don't Worry About Taxes

The money you put in your traditional IRA grows in a tax-deferred environment, and the money you put in your Roth IRA grows in a tax-free environment. This means you can invest in aggressive growth investments and not worry about capital gains taxes.

If aggressive investments fit your investing needs, a retirement plan is a great place to house those assets, which normally might generate annual tax bills. When you begin receiving distributions at retirement age from a traditional IRA, you will pay normal income tax at your then marginal rate. Roth IRA distributions won't be taxed at all.

Many investors use Roth IRAs as opposed to traditional IRAs if they believe they will be in a high tax bracket after retirement. (You could find yourself in a high tax bracket after retirement if you no longer have dependent deductions, mortgage interest deductions, or other write-offs you enjoyed while working.) Our Roth IRA Analyzer can help you determine which IRA is right for you.

Contribute the Maximum

Current IRA regulations allow you to contribute up to $5,500 per year to an IRA. (Note: If you have both a traditional IRA and a Roth IRA, the total contribution cannot exceed $5,500. Check with your financial or tax adviser for more details.)

You should take full advantage of this limit if possible, and work hard to increase your annual amount with the new changes. You can use our "How Will Higher Contributions Affect You?" calculator to see how the changes in limits could affect your retirement.

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