One of the best things you can do for your retirement savings is to start saving and investing as early as possible. Even consistently investing relatively small amounts can add up to a lot over time, thanks to compound earnings.

In investing, compound earnings occur when the money you earn on an investment begins to earn money on itself. It’s a lucrative snowball effect that becomes more lucrative with more time, making it perfect for retirement savings.

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For perspective, let’s imagine you invest $500 monthly into an IRA and average 10% annual returns for 20 years. After those two decades, you would have around $343,650 in your account (not accounting for fees from funds you potentially invest in).

And here’s the cherry on top: You would have personally invested only $120,000 during those 20 years.

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The tax breaks of a traditional IRA and Roth IRA

The two main types of IRAs are traditional and Roth, both of which must be opened on your own, unlike a 401(k), which is provided through your employer.

A traditional IRA is similar to a 401(k) in that contributions may lower your taxable income for the year they are made. Whether your contributions are tax-deductible depends on your income, filing status, and whether you or your spouse are covered by a workplace retirement plan.

A Roth IRA has a unique tax break. Instead of contributions being tax-deductible, you contribute after-tax dollars, and then you can take tax-free withdrawals in retirement. The only criteria is that you’re at least 59 1/2 years old and made your first contribution at least five years prior.

If you made the $500 monthly investments in a traditional IRA, you would owe taxes on the withdrawn money in retirement. If you made the investments in a Roth IRA, the entire $343,650 would be yours.

The $22,924 Social Security bonus most retirees completely overlook

If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $22,924 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.

View the “Social Security secrets” »

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