How Much Should You Contribute to Your Roth IRA?
Deciding to save for retirement today could help you have a more secure future.
An IRA is an effective savings tool since it allows you to access financial markets in a tax-advantaged manner.
The two main IRA savings vehicles and Traditional IRA and Roth IRA.
Traditional IRA contributions are tax-deductible now, but you will pay income tax on retirement withdrawals.
With a Roth IRA, you pay taxes on contributions now, but that income won’t be taxed in retirement — provided you adhere to withdrawal rules.
The big question is, how much should you contribute to a Roth IRA, and how often should you do it?
Who Can Contribute to A Roth IRA?
You can contribute to a Roth IRA at any age if you (or your partner if filing jointly) have taxable compensation.
Your modified adjusted gross income (MAGI) should be under limitations set by the IRS (see below).
How Much Should I Contribute to A Roth IRA?
The amount you should contribute to your Roth IRA depends on your income, age, retirement goals, and overall financial situation.
The annual contribution limit for Roth IRA is $6,500 for those under age 50 and $7,500 for those 50 and older in 2023. However, these limits may change next year. It’s vital to check the contribution limit every year, as it’s subject to change.
If you inadvertently exceed your annual Roth IRA contribution limits, the IRS will tax the excess amount.
If you can max out your Roth IRA contributions, that’s a great way to take full advantage of the benefits of a Roth IRA. However, if you cannot max out your contributions, you should still try to contribute as much as you can afford. Thanks to the magic of compound interest, even small contributions can add up.
“It’s also important to consider your overall savings strategy,” says Daniel Lerner, Executive Vice President, Investment Services, at David Lerner Associates. “It would be best if you balanced your contributions to Roth IRA with contributions to other savings accounts, such as a traditional IRA or 401(k), to meet your retirement and overall financial goals.”
Benefits of a Roth IRA
- No contribution age restrictions
- Access to a wide range of potential investment options
- Earnings grow tax-free
- Option to convert other retirement savings into a Roth IRA
- A flexible withdrawal strategy in retirement
- Tax-free withdrawals for your heirs if a Roth IRA is part of your estate plan
When Should I Contribute to an IRA?
As soon as possible!
With investing, time is your greatest asset.
This means the sooner you save, the longer your money has to grow.
If you invest $20,000 and generate the average 7 percent inflation-adjusted market return, it would be worth $38,000 after 10 years, $108,000 in 25 years, and $298,000 in 40 years.
Remember, the market may return more or maybe yield negative returns in a year. However, over long periods, time in the market significantly impacts growth.
Again, if you haven’t started saving for retirement yet, don’t fret. It’s never too late to start!
How Often Should I Contribute to A Roth IRA?
Experts encourage making consistent contributions.
To make work easier, automate the process.
You can contact your HR department to set up an automatic transfer from your checking to your retirement account.
What Is the Deadline to Make Roth IRA Contributions?
The deadline to make contributions is your tax return filing deadline (excluding extensions).
For instance, you can make 2022 IRA contributions till April 18, 2023.
Conclusion
A Roth IRA can be an attractive way of saving for retirement.
The rules are complex, meaning this retirement savings account may not suit everyone. When making big retirement planning decisions, it’s always advisable to consult a financial advisor.
IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc.
This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual’s personal circumstances.