Do you recall the first time your speedometer climbed beyond 70, 80, or even 90 miles per hour? It was a thrilling, though brief, experience. Comparatively, maxing out your Roth IRA is not as thrilling, but can be a lot more gratifying.
A Roth IRA is a popular individual retirement account because it allows you to invest in a wider range of assets with lower costs than employer-sponsored plans. In 2021 and 2022, the maximum Roth IRA contribution is $6,000 ($7,000 if you’re 50 or older). You have until mid-April to put money to your IRA for the previous tax year, unlike other tax-related contributions. So make sure to fill out a 5498 tax form.
That’s great news for savers, and the guidelines below can help you maximize your contributions.
1. This can operate as longevity insurance because there is no compulsion to remove cash.
One of a Roth IRA’s distinctive features is the lack of a requirement to begin pulling money out at a set age. Other tax-deferred alternatives, such as a standard IRA or a 401(k), require account holders to begin withdrawing funds by the age of 72.
Consider your family’s history. Is one of your grandparents, who is 90 years old, still alive? While the average American today has a life expectancy of around 77, breakthroughs in science have the potential to extend that time span. A Roth IRA is a savings account that you may put money into and then withdraw when you think the timing is right. Regardless of your current age, the far older version of yourself will be grateful for those maximal contributions.
2. Your contributions may also benefit your heirs.
You may never use the money in your Roth IRA, so your heirs will be the ones thanking you for maxing out your contributions.
Your heirs will normally have to withdraw the money over a 10-year period after your death (though there are exceptions) but because it is a Roth IRA their withdrawals will be tax-free.
3. Because the regulations may change in the future, it is critical to maximize existing potential.
You can’t be certain that you’ll be able to contribute to a Roth IRA in the future. Congress may explore decreasing the yearly income restrictions and other modifications, such as limiting who may convert a tax-deferred retirement account to a Roth IRA or restricting the usage of a backdoor Roth IRA. So, while the advantage is still available, don’t let it pass you by.
4. Create a financial plan.
After you’ve created an account, you’ll need a strategy for investing the money you put in initially as well as monies you’ll deposit later. Keeping things simple is frequently the best strategy. Consider a broad-market index fund, whether it’s a mutual fund or an exchange-traded fund, as part of your asset allocation (the mix of different assets in your account, such as stocks or bonds). Want more information? See how to invest your IRA in these recommendations.
If feasible, choose an automated trading strategy when setting up your account to profit from dollar-cost averaging. This is a method of spacing out your purchases over time to avoid investing all of your money at once while prices are high.
5. Be aware of your limitations.
Don’t be discouraged if you can’t contribute the maximum amount to a Roth IRA this year. It’s possible that achieving this aim will take some time. Over the course of a decade or two, even a few hundred dollars invested can grow to several thousand dollars.
When in doubt, be cautious. Don’t try to max out your IRA if you’re still paying off high-interest debt or don’t have enough money to support your monthly needs. Contribute whatever you can this year, and make a commitment to raise your contribution in the future.