How to Max Out Your Roth IRA in 4 Steps - MagnifyMoney

How to Max Out Your Roth IRA in 4 Steps

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It might feel like a far-away goal to max out your Roth IRA if you have one. Since Roth IRAs are taxed when you make contributions and not when you take money out, it may seem like you’re putting even less money in at first deposit.

But that doesn’t mean you shouldn’t fill up your Roth IRA every chance you get. Remember when you take money out later in life, it’s all yours — the IRS already took its share.

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Should I max out my Roth IRA every year?

Yes, of course. But the caveat is: only if you can.

“If you are eligible for a Roth, consider maximizing the contribution limit based upon other lifestyle and cash flow needs. The ability to compound investment performance over decades results in significant value when you need to access it. However, it is a balance test, sometimes life throws us curveballs, so don’t punish yourself if you can’t fill it”-Bryan P. Koepp, SVP Wealth Planning Executive, Regions Bank

If you have a work-sponsored 401(k) and your employer matches, this should be your priority. Take advantage of this generous match for as long as possible. All your independent retirement investment accounts should come after this.

Once you’ve contributed enough to get your employer’s full match, craft your budget to include the most you can put into your Roth IRA. It’s always a good idea to contribute the most you can. The more you save early on in your career, the more you’ll have in retirement from letting it build over time.

Compound interest — or interest building on top of interest — can increase your retirement savings much more than if you were to start saving later in life. If one day you lose your job or you can’t work anymore, using the time you had now to save every chance you get will be helpful.

How to max out your Roth IRA

1. Open an account

If you don’t have a Roth IRA, now is the time to get one. But first, you need to make sure you’re eligible.

Roth IRAs have eligibility and contribution limits based on your income. If you file your taxes as a single or head of household, you can’t contribute to a Roth if you earn more than $144,000 per year. For the 2022 tax year, individual taxpayers earning between $129,000 and $144,000 you can contribute, but not the full amount. If you’re married and file jointly, you need an income of less than $214,000 to be eligible.

If you earn too much, you might want to look into different IRA types, like a SEP IRA or traditional IRA. These don’t have income requirements like Roth IRAs do and you can max out contributions without worry.

If you have to open a Traditional IRA now, don’t worry. You can still roll over to a Roth IRA later. This is sometimes called a “backdoor IRA,” where you start with a Traditional IRA and then convert to a Roth IRA.

2. Understand contribution limits for 2021

The maximum amount you can contribute changes often. The Roth IRA contribution limit for the tax year 2022 is $6,000, or $7,000 if you’re 50 or over. While maxing out your Roth IRA is a great feeling, the contribution limits might be high if you don’t have a lot of wiggle room after your other financial obligations. Consider contributing what your budget allows.

Don’t forget about last year, too. If you didn’t contribute to a Roth or max out your contributions last year, you have until April 15 to make contributions for the previous tax year.

3. Never skip a contribution window

You don’t get a lot of chances to make something up. To max out your Roth IRA, you get a full year plus the first four months of the next year to contribute as much as you’re allowed to. But after that, you’re out of luck: once the window closes for the year, it doesn’t open again.

That means you can’t wait to make contributions because you think you have time. Time will run out before you know it.

4. Set up a contribution plan

Because of your limited open window, you’ll need to stay diligent about making contributions. If your Roth IRA allows it, set up auto-deductions to make deposits every month to take advantage of dollar cost averaging. When auto-deductions aren’t available, you can add calendar reminders to let you know when it’s time to pay into your Roth IRA.

If you can’t set up monthly payments, you can look into making a few big payments or one lump sum. If you plan on getting a hefty tax refund, you might consider using it to max out your Roth IRA.

Are you trying to max out your Roth IRA?

Don’t be discouraged if you can’t max out your Roth IRA this year. It’s not always feasible since life has a way of changing when we least expect it. Whatever your situation is, it’s okay to take care of your pressing obligations before your retirement plan. On the other hand, if you can max out your Roth IRA and have more money to invest, consider aiming to max out your 401(k), too.

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