10 Myths of IRA Investing

How to separate fact from fiction

Research shows that more than half of Americans are missing out on one of the best retirement savings opportunities — an IRA. And it's mainly because of misperceptions about them. Here are some common ones.

  1. I can't contribute to both my 401(k) and an IRA in the same year.

    More than half (52%) of Americans who do not have an IRA believe that they cannot contribute to both an IRA and a workplace savings plan in the same year.1 The fact is, for tax year 2007, an individual, even if they contributed to a 401(k) in 2007, can contribute up to $4,000 to an IRA. And they have until April 15, 2008 to make a contribution. For 2008, an individual can contribute up to the annual contribution rates for both a 401(k) ($15,500) and an IRA ($5,000). Those age 50 or older can also add an extra $1,000 to an IRA and $5,000 to a 401(k).

  2. My 401(k) savings should be enough.

    Fidelity estimates that retirees will need 85% to 100% of their preretirement income to live comfortably2 so a workplace savings plan may not be enough. Using an IRA now to supplement workplace programs can help investors ensure their savings will continue to grow and last throughout retirement. Fidelity's myPlan Retirement Quick Check3 (login required) is designed to help investors identify their retirement income goals, create a retirement plan, and stay on track to meet their goals.

  3. I have to come up with thousands of dollars all at once to open an IRA, and then spend a lot of time monitoring the investments in it.

    While almost half (48%) of non-IRA owners say they don't have the extra money to put into an IRA,1 some products are making it easier to get started. Fidelity's SimpleStartSM IRA process helps you automate saving and investing for retirement with one account application. The $2,500 minimum is waived when you enroll in automatic contributions depositing $200 a month in your IRA.4 Periodic investment plans do not assure a profit or protect against a loss in a declining market.

  4. If I make too much money to qualify for a tax deduction, an IRA isn't right for me.

    While it's true that a 2008 Traditional IRA contribution of $5,000 is only fully tax deductible for households earning less than $85,000 annually,5 contributing to a Roth IRA, or a nondeductible Traditional IRA can also benefit your retirement savings. The Roth IRA is one of the only retirement savings vehicles available today that allows for federal tax-free withdrawals.6 Even a non-deductible Traditional IRA still offers tax-deferred growth. Remember that 2007 contributions can be made until April 15, 2008. (Contributions for 2008 can made any time in 2008 and up until April 15, 2009.)

    How Fidelity can help

    Which IRA is right for you: Roth or Traditional?

  5. Retirement is 20 years away, so I have plenty of time to save in an IRA.

    Starting to save as early as possible is one of the best ways to prepare for the future, and the earlier you start, the harder your money will work for you. A hypothetical investor age 25 who puts $250 a month in an IRA that earns a hypothetical 7% annual rate of return until age 70½ could end up with almost $1 million for retirement.

    This hypothetical example assumes the following: (1) monthly $250 IRA contributions made on the first of each month beginning at age 25 and continuing through age 70, (2) annual rate of return of 7%, compounded monthly, and (3) no taxes on any earnings within the IRA. The ending values do not reflect taxes, fees, or inflation. If they did, amounts would be lower. Earnings and pre-tax (deductible) contributions from Traditional IRAs are subject to taxes when withdrawn. Earnings distributed from Roth IRAs are income tax free provided certain requirements are met. IRA distributions before age 59½ may also be subject to a 10% penalty. Systematic investing does not ensure a profit and does not protect against loss in a declining market. This example is for illustrative purposes only and isn't intended does not represent the performance of any security in a Fidelity IRA. Investing in this manner involves risk, including the risk of loss.

    Important Information about this example*.

  6. Skipping a year of IRA contributions won't make much of a dent in my future savings.

    Many people share this false belief. Even a small amount of money contributed this year could yield major benefits over time. An investor who skips a 2008 IRA contribution could be missing out on a lot more than $5,000 one day. Making a one-time $5,000 deposit today at age 35 could potentially result in $53,000 by retirement. In fact, whatever amount that is put away could still add up for tomorrow. Contributing to an IRA every year has the potential to really add up over time.

    This hypothetical example assumes the following: (1) one annual $5,000 IRA contribution made on January 1 of the first year (2) annual rate of return of 7%, and (3) no taxes on any earnings within the IRA. The ending values do not reflect taxes, fees, or inflation. If they did, amounts would be lower. Earnings and pre-tax (deductible) contributions from a Traditional IRA are subject to taxes when withdrawn. Earnings distributed from Roth IRAs are income tax free provided certain requirements are met. IRA distributions before age 59½ may also be subject to a 10% penalty. Systematic investing does not ensure a profit and does not protect against loss in a declining market.

  7. I am self-employed, so I am not eligible for an IRA.

    Good news: Virtually anyone with earned income can save in an IRA. Better news: Self-employed individuals can contribute up to 25% of compensation7 or $45,000 in a SEP-IRA for 2007 and $46,000 for 2008.

    How Fidelity can help

    Learn more about self employed and small-business retirement plans

  8. If I consolidate my 401(k)s from my past jobs into a Rollover IRA, I won't be able to add any additional money to it.

    The majority of Americans juggle their retirement savings across multiple accounts.1 An investor who consolidates multiple employer savings plans into one account, can continue to contribute to that account, and will also find it easier to analyze their overall portfolio and ensure the investments within are properly diversified.

  9. I am approaching retirement, so my IRA savings years are over.

    Experts predict that the annual shortfall in American retirement income will be $57 billion by 2030.8 To help pre-retirees save as much tax-advantaged cash now as possible, the government created IRA catch-up provisions. These allow investors age 50 and over to save $1,000 more annually in an IRA to help make up for lost time.

  10. I'm getting a 2007 tax-filing extension, so I can wait until then to fund my IRA for 2007.

    Waiting past Tax Day would mean skipping your 2007 IRA contribution, since those made after April 15, 2008, will be applied as a 2008 IRA contribution.9 Although it's a good idea to get a jump on next year's contribution — which could potentially reap additional compounding — consider making your 2007 contribution first.

  1. "A Study on IRAs," Northstar Research Partners for Fidelity Investments, November 2007.
  2. "Improving America's Retirement Readiness," Greer and Harlow, Fidelity Management and Research Company, 2005.
  3. Educational tool developed by Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments company.
  4. The minimum automatic contribution is $200 per month (or $600 per quarter). Non-Fidelity Funds and certain Fidelity Funds not eligible.
  5. Subject to retirement plan participation status and modified adjusted gross income (AGI) limits. For 2007, full deductions are allowed for single filers who earn $52,000 or less and a partial deduction may be permitted up to $62,000. For 2007, full deductions are allowed for married filing joint filers who earn $83,000 or less and a partial deduction may be permitted up to $103,000. For 2008, full deductions are allowed for single filers who earn $53,000 or less and a partial deduction may be permitted up to $63,000; married joint filers who earn $85,000 or less may be permitted a partial deduction up to $105,000.
  6. Contributions can be withdrawn at any time without paying taxes or penalties. Earnings can be withdrawn federally tax free and penalty free if the five-year aging requirement and one of the following other conditions are satisfied: age 59½, death, disability, qualified first time home purchase.
  7. The maximum compensation on which contributions can be based is $225,000 for 2007 and $230,000 for 2008. For the self-employed, compensation means earned income.
  8. EBRI, Americans' Future Retirement Security: Implications of the EBRI-ERF Retirement Security Projection Model (February 2004).
  9. Exceptions apply for persons serving in officially sanctioned combat zones.

Before investing, consider the funds' investment objectives, risks, charges and expenses. Contact Fidelity for a prospectus containing this information. Read it carefully.

Performance of the Freedom Funds depends on that of their underlying Fidelity funds. These funds are subject to the volatility of the financial markets in the U.S. and abroad and may be subject to the additional risks associated with investing in high yield, small cap and foreign securities.

*This example assumes annual tax-deferred compounding in an IRA. An individual's account may earn more or less. The ending values do not reflect taxes, fees, or inflation. Final account balances are prior to any distributions, and taxes may be due upon distribution. Distributions from retirement accounts prior to age 59½ may be subject to a 10% early withdrawal penalty. Periodic investment plans do not ensure a profit or protect against a loss in a declining market.

**Assumes hypothetical annual rate of return of 7% and tax-deferred compounding in an IRA over 35 years. The ending values do not reflect taxes, fees, inflation, or any distributions taken. Taxes may be due upon distribution. If distributions are taken before age 59½, there may be a 10% penalty.

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