If you didn't have a chance to maximize your Roth IRA (individual retirement account) contributions last year, don't beat yourself up. There's still time to crush your retirement savings goals. The IRS pushed back the filing due date for individuals submitting a 2020 tax return, giving you a few more weeks to make Roth IRA contributions for 2020.
Here are some insights to help you make the most of your 2020 Roth IRA success plan and sprint to the finish line with ease.
The countdown has started
Contributing to a Roth IRA is one opportunity that you don't want to pass you by. It's one of the most attractive accounts in the retirement world -- especially for younger savers.
For starters, anyone can contribute as long as they have earned income for the year and fall within the income threshold. The best part is that you can always withdraw what you contribute without worrying about taxes and penalties. Essentially, your Roth IRA can serve as a last resort emergency fund if you ever find yourself in a financial bind.
But there's one benefit that remains a huge incentive for retirement savers: Tax-free income. This is a big deal when tax rates are constantly changing and you have no idea what taxes will look like when you retire. A Roth IRA allows you to contribute money you've already paid taxes on, invest in stocks that align with your goals, and earn profits that will be 100% tax-free after you've met the account requirements.
It's a sweet deal that comes with a ton of perks. But you can only reap the benefits when you take every chance possible to make annual contributions. Since the IRS pushed the tax filing deadline to May 17, it's not too late to add more money to your 2020 Roth IRA.
Increase your 2020 Roth IRA contributions
Although you're probably anxious to start your 2021 Roth IRA contributions, it's best to max out your prior year's contributions first before time runs out. You'll have the entire year to focus on 2021. Take advantage of your final chance to wrap up 2020 in a financially responsible way.
What are your 2020 retirement savings goals? Remember, your Roth IRA contributions are capped at $6,000 if you're under 50. There's a catch-up contribution bonus of $1,000 if you're 50 and over. Therefore, take a look at what you've already contributed for 2020. If you've put in $4,000 for the year already, you can only contribute up to $2,000 (if you're under 50).
Now that you know the maximum amount that you can contribute, think about how much money you want to add to your Roth IRA prior to the tax deadline. You can set up recurring deposits to your Roth IRA to automate your contributions. Once you've hit your 2020 goals, you can start 2021 with an action plan that will allow you to achieve your goals with more ease.
You may not be eligible forever
Overall, a Roth IRA is a limited-time offer. Once your income exceeds the thresholds, you can no longer make a direct contribution to a Roth IRA. You also have no idea what future Roth IRA laws and limitations will look like. Failing to do your research and take the best actions now may cause you to forfeit an opportunity that can have a profound effect on your financial health in retirement.
If you're serious about your retirement success, you have to start planning for it now. First, determine if you're eligible to make a direct contribution to a Roth IRA. Single filers must have a Modified Adjusted Gross Income (MAGI) under $139,000 in 2020 and under $140,000 in 2021 to qualify. Married filers must have MAGI under $206,000 for 2020 and $208,000 for 2021. Those who earn just under those limits won't be able to contribute the full amount to a Roth but can make partial contributions.
If you expect your income to rise in 2021, it's great to take advantage of the perks available to you now while you're in a lower income bracket.
Say goodbye to 2020 in style
The final days leading up to the tax deadline can be a bit chaotic. But it can also be rewarding. You have a chance to make up for any shortfalls in the prior year by making smart moves before the tax filing deadline.
Making contributions to your Roth IRA gives you a final opportunity to wrap up 2020 in an effective way. Although maxing out your Roth IRA may not make you rich now, you'll have the power of compounding working on your side for years to come. It's the sum of the actions you take every year that will put you in the driver's seat of your financial success later.