If you just made an IRA contribution to get it in before the tax filing deadline, the first thing to know is that you have to actively do something with the money or it will sit in cash—unlike a workplace 401(k) that’s allowed to have defaults or automatic investments in place. Up to 40% of people forget this important step on all types of IRA accounts—traditional IRAs, Roths and rollovers—according to Fidelity. Over time, if you leave the funds in cash, you’ll lose out to inflation. Since IRA savings are meant to be for retirement, you want to get as much growth out of them as you can.
If you pick a traditional IRA, you may qualify for a tax deduction on your current taxes, and your account will grow tax-deferred. Or you can choose a Roth IRA and pay the taxes upfront and have the growth be tax-free ever after. The IRS contribution limit for both types in 2022 is $6,000, or $7,000 if you’re 50 or older, and that goes up over time with inflation. That might not seem like a huge amount, but the real value is in your returns. At 1% rate of growth—which is actually more than the national average interest rate for savings accounts, according to Bankrate.com—you’d have just $6,627 after 10 years, and who knows what that will actually buy you by then. If you make the effort to get 4%, which is closer to the rate of Treasurys, CDs and money-market funds, you’d have around $8,880. If you put the money in the stock market and it earns an average return of 6%, you’d likely have $10,745—you might have more, …