If you're on a mission to generate more tax-free earnings during retirement, you don't want to miss out on your annual Roth IRA (individual retirement account) contributions.
For those who qualify, a Roth IRA allows you to contribute money you've already paid taxes on and invest in assets that can grow your portfolio. Here's the bonus: All of your earnings accumulate in your account tax-free. The more you contribute every year, the greater your chances are of earning more income during retirement.
Fortunately, there's still time to contribute to your 2020 Roth IRA. The IRS has extended the tax-filing season to May 17, which gives you more time to achieve your 2020 contribution goals. Here are some tips to help you get to the finish line with ease.
Set a contribution goal
Let's start with your goal. Once you have a target number in mind, you can work the numbers and identify various ways to achieve your goal.
For 2020, most retirement savers with earned income are eligible to contribute up to $6,000 to a Roth IRA account. If you earned less than $6,000 in 2020, you can only contribute up to the amount of your total earned income for the year. That means if you only earned $4,000 for the year, you cannot contribute more than $4,000 to a Roth IRA account.
But if you were 50 or older by the end of 2020, there's some good news to take into consideration as you're setting your retirement contribution goals. The IRS provides individuals 50 or over with a $1,000 catch-up contribution. Older taxpayers can stash away up to $7,000 in a Roth IRA account, providing an incredible opportunity to accumulate more tax-free income.
Review your money
Although it would be ideal to contribute the maximum amount to your Roth IRA, you won't be penalized if you don't. You are not required to contribute a minimum amount on an annual basis. It's completely up to you when you fund your account and how often you do it.
As the contribution period for 2020 is dwindling down, it's important to think about ways you can allocate more funds to your Roth IRA account now so you can fund your dream lifestyle during retirement. Take a look at your income and expenses. Is there a way that you can boost your incoming cash or decrease the amount of money that flows out of your pocket? If so, you are in a position to transfer extra funds to a Roth IRA.
If you have a lump sum of cash coming your way, consider setting a portion of the funds aside in a Roth IRA. By planning ahead and reviewing your money now, you can identify ways to add more money to your 2020 Roth IRA. Once your window of opportunity closes, you won't be able to turn back the hands of time.
Automate your Roth IRA goals
There's no need to keep tabs on your brokerage account every day to achieve your goals. You can automate your success by setting up weekly direct deposit amounts.
This is the time to consider contributing 10%, 20%, or 30% of your earnings to your Roth IRA if you've already met your emergency fund goals and are financially secure.
But if you really want to expedite your progress, contribute as much as you can -- aim for 50% of your pay if that works for your financial situation. Remember, you'll only have to double up on contribution amounts for a short period of time. You can return to lower contribution amounts after the tax deadline passes.
It's important to note that you don't have to invest the funds in your Roth IRA as soon as you deposit the funds in your account. You can make investment decisions later. The goal right now is to fill your Roth IRA with as much money as you can, so that you can take advantage of 2020 Roth IRA contributions before your time expires.
Position yourself for financial success
Once you turn 59 1/2 and you've met the five-year rule, you'll be able to withdraw funds and enjoy tax-free earnings. That means if the value of the assets in your Roth IRA grows to $1 million, you'll be able to withdraw the entire balance without worrying about the IRS knocking on your door.
Think of your contribution as a gift to your future self. The more money you can contribute to your Roth IRA now, the more you can benefit from the power of compounding and tax-free earnings. Contributing to your 2020 Roth IRA will get you one step closer to making all your retirement dreams a reality.