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Average IRA contributions reach all-time high

By Scott Gamm/

Americans are contributingmore money than ever to their IRAs, a new survey says.

Fidelity Investments analyzed more than 7 million IRA accounts and said the average contribution for 2013 stood at an all-time high of $4,150, a 4.7 percent increase since 2012. On average, Americans held $89,100 in their IRA, up roughly 10 percent over the past year.

"The fact that IRA contributions are up across all age groups is a positive indication that many people are indeed committed to saving for retirement by putting at least a portion of what they earn into tax-advantaged vehicles such as an IRA," said Ken Hevert, a vice president at Fidelity Investments.

Consumers flock toward IRAs as alternatives or substitutes to the traditional401(k) plans offered by employers. If you're self-employed or dissatisfied with your company's 401(k), an IRA can be opened up on your own through a discount brokerage firm. In fact, some consumers doubled down on retirement savings by contributing to a 401(k) and an IRA.

Rick Salus, a senior vice president and investment officer with Wells Fargo Advisors, says you should exhaust your 401(k) options before thinking about contributing to an IRA. "Many companies offer a match and if they give you 50 cents on the dollar up to 5 percent of your salary, you'll want to maximize that, otherwise you're turning away free money."

The maximum contribution for 401(k)s stands at $17,500 for 2014.

He also suggests maintaining enough money in emergency savings, ideally six months worth of expenses, in case you lose your job. Per a MainStreet report from June, one-quarter of Americans have no emergencysavings account.

When it comes to IRAs, plenty of consumers rely on Roth IRAs,which come with unique tax benefits. With a Roth IRA, you contribute money you've already paid taxes on and your money grows tax-free. With a traditional IRA, your money grows tax-deferred -- that is, you contribute pre-tax dollars and pay ordinary income taxes upon withdrawal, similar to the 401(k). Plus, your contributions to a traditional IRA may be tax deductible, based on certain income thresholds.

The maximum contributions for traditional IRAs and Roth IRAs for 2014 stand at $5,500 if you're under age 50 and $6,500 if your over age 50.

"Any time you can get tax-free returns over tax-deferred, I like that," Salus adds.

The report suggests younger Americans are taking retirement savings more seriously, with 3.9 percent of those in their 20s and 6.7 percent of investors in their 30s upping their average contributions in 2013, compared to 2012.

The key to any successful retirement savings strategy is to start young to take advantage of compounding interest.

One retirement savings goal is to put your financial situation on autopilot, by relying less on total market returns. "When you start to reach your 60s, you need to have a lot of your income needs covered by interest or dividends," Salus tellsMainStreet. "You can afford to live off of total returns, but if the markets go down, then you have negative total returns."

Scott Gamm is the author of More Money, Please: The Financial Secrets You Never Learned in School.

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