How We Use IRAs
According to the latest Federal Reserve study (Survey of Consumer Finances 2022), only 54.3% of American families have any retirement account at all – which means almost half of families have no retirement savings whatsoever. The median retirement account balance among families that have one was $86,900. Since immigrants work in the US for a shorter time than Americans, generally earn less and are often less familiar with the principles of household finance, they use retirement accounts even less. Here are some common misconceptions about how effective IRAs are.
“I Invest in an IRA”
This statement makes as much sense as “I invest in a joint account.” An Individual Retirement Account is a type of account that offers tax advantages: for most people contributions are tax-deductible, and the money in it grows tax-deferred. An IRA can be opened at a bank, a mutual fund or a broker, and the money can be invested in any financial instruments: bank deposits, stocks, bonds, all kinds of mutual funds. So we don’t invest in an IRA, but in the instruments we put into the IRA.
“How Much Will My IRA Pay Me?”
An IRA won’t pay you anything. An IRA is not an annuity, but a tax-advantaged individual account that will hold as much as we put in, plus whatever our investments earn over time. I explain how all the individual retirement accounts available in the US work in the book “Amerykańskie emerytury” (“American Pensions”).
To give our money a chance to grow, we should deposit it regularly in profitable financial instruments. For the average person, with a few decades or a dozen or so years until retirement, these should be not bank accounts paying a fraction of a percent, but diversified stock mutual funds, preferably ones that track the market average (index stock mutual funds).
“I Invested $3,000, but It Didn’t Do Much”
Leaving a small amount in a savings account is not an investment. Even over 20 years, assuming average interest of 3 percent, $3,000 will grow to only $5,418, which will not change our life situation much, because it will barely keep pace with inflation. But if we deposit $3,000 at the beginning of every year, after 20 years we will have about $83,000, assuming an average 3 percent return.
You can achieve much more. First, it is worth contributing as much as the rules allow: in 2026 up to $7,500 a year, plus an additional $1,100 for people who have turned 50. The IRS changes these limits every few years and posts the current amounts at irs.gov. Moreover, it is worth placing your IRA not in a bank, but in one of the mutual funds.
From 1994 to 2023, the stocks in the Standard & Poor’s 500 basket returned an average of 10% a year including dividends, despite several painful crashes. In the decade 2014–2023, the S&P 500 index grew 10.2% a year, and with reinvested dividends – 12.2% a year. Over the entire last century, the stock market returned an average of 6.5%, and with reinvested dividends – 10.5%, which documents the long-term trend. No wonder the rich (who keep their money in company stocks) keep getting richer. Remember, however, that past results do not guarantee future gains.
Don’t Hide Your Money Under the Mattress
If you and your wife regularly contribute a combined $12,000 a year to IRAs (a thousand dollars a month) and invest, for example, in ETFs that track the NASDAQ 100 or the S&P 500 index, then – assuming an average return of about 10% a year, as in the past – after 25 years you will become millionaires and will be able to enjoy a carefree retirement.
“Tax Savings Aren’t Worth the Bother”
Many people don’t use IRAs because they consider the tax advantages insignificant. With small amounts and a short time horizon, the benefits are indeed not large. But over many years they make a big difference.
Let’s go back to the example of investing $3,000 a year in stock funds and assume that over 20 years they return an average of 10% a year. In an IRA we will then accumulate about $189,000. In a regular account, taxes (federal, state, local) could eat up as much as a quarter of the income, which would reduce the rate of return to 7.5%. Then the balance of that regular investment account after 20 years would be about $139,700 – almost $50,000 less than in the IRA. (We will pay income tax on withdrawals from a traditional IRA, but only in retirement.)
The impact of taxes is even more visible if we assume that we contribute not only the sample $3,000, but also the amount saved on taxes. Assuming our combined tax rate is around 25%, we will save $750 in taxes, which, added regularly (a total of $3,750 a year) to an IRA invested in stock funds (that is, in the stock market), will grow after 20 years – with the same assumption of 10% a year – to about a quarter of a million dollars. And that is how you become rich without major sacrifices, because almost anyone can save $3,000 a year.
You can do your own calculations with the compound interest calculator of the Securities and Exchange Commission (SEC): www.investor.gov – Compound Interest Calculator.
“I Need Several Accounts for Diversification”
Not true. Having many accounts causes unnecessary trouble and multiplies the cost of maintaining them (custodial fees). It is the contents of the account that should be diversified, which an index ETF does effectively. I explain these instruments in the article “Exchange Traded Funds i jak na nich zarobić” (“Exchange Traded Funds and How to Make Money on Them”), which you will find on the PoradnikSukces.com website. There you will also find my article “Jedyna strategia inwestycyjna, jakiej potrzebujesz” (“The Only Investment Strategy You Need”).
“I Don’t Have the Money to Contribute to an IRA”
Besides the tax deduction and tax deferral, an IRA has another advantage, namely the little-known retirement credit (Saver’s Credit), which is available precisely to people with moderate earnings.
It works like this: people with moderate earnings (in 2026, AGI up to $80,500 for married couples filing jointly and up to $40,250 for single filers) can get from Uncle Sam 10 to 50 percent of what they contribute to a retirement account, that is, up to $1,000, and twice as much for married couples filing jointly where both spouses contributed to an IRA. That is up to a 50 percent immediate return. Free money that the taxman gives you so that you save for your old age! How many years would you have to wait for such a return keeping your money in a bank that pays a fraction of a percent a year?
Conclusion
The surest and easiest way to secure a comfortable future is patient, regular saving in a tax-advantaged retirement account and investing the money in diversified stock mutual funds, preferably index ETFs. Start investing as soon as possible, because time is your greatest ally.
Updated October 2026.
