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4 Unexpected Ways to Level Up Your IRA

By Sam Swenson, CFA, CPA - Updated Jun 8, 2021 at 4:41PM

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A few simple upgrades are there for the taking.

The truth remains that the decision to open an IRA is one of the best ones you can make for your retirement. IRAs can be confusing, but it turns out that there isn't much to be afraid of once you get the basics down. Let's look at four ways to upgrade your IRA almost immediately.

1. Don't pay anything for it

One way to instantly level up your IRA is to get it for free. There are a multitude of free IRA providers out there, ranging from old stalwarts like Vanguard to some of the newer fintech firms like Betterment or Wealthfront. What you definitely don't need is an IRA provider telling you it costs something to have an IRA. There's simply no reason for that fee, even if it's $50 a year -- so don't tolerate unnecessary fees and choose a provider that's willing to accommodate you. 

2. Make it a Roth

Roth IRAs, especially in a time of somewhat reduced taxes, make for a powerful investment planning tool. Once you've contributed money to a Roth IRA, you'll never pay tax again: not on dividends, not on growth, and not when you withdraw the money in retirement. 

Given that there's a better than even chance that taxes will rise broadly in the coming decade, it pays to get the tax liability out of the way now and focus on throwing as much money as possible into your Roth IRA. When it comes to money invested in a Roth, there's something incredibly freeing about knowing your obligations to the IRS are completely over. Make sure to at least make partial contributions when you can. 

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3. Keep your pre-tax IRAs empty 

This is mainly for higher-income earners, but keeping your pre-tax IRAs (this includes traditional IRAs, SEP-IRAs, and SIMPLE IRAs) empty is a nice trick to pave the way for seamless Backdoor Roth IRA contributions. As a quick reminder, a Backdoor Roth contribution is meant for people who earn above the income limits required to contribute directly to a Roth IRA. 

A quick refresher of the Backdoor Roth IRA steps:

  • Contribute money (up to $6,000 in 2021) to a traditional IRA.
  • Do not invest the money -- keep it in cash.
  • Convert the balance in your traditional IRA to a Roth IRA.
  • Invest the money in the Roth IRA according to your asset allocation. 

If you have an existing balance in your traditional IRA, you're liable to pay unwanted taxes every time you attempt a Backdoor Roth contribution. This ultimately makes for a nuisance and will complicate your planning down the line, so consider focusing on the Roth IRA and leaving pre-tax IRAs empty. A zero tax liability forever doesn't sound so bad! 

4. Pretend it's not there

Unlike many things in life, the process of opening an IRA is a good time for you to "color inside the lines". IRA stands for Individual Retirement Account, and believe it or not, it's best suited for that purpose. You'll be much better off if you contribute to your IRA and let it grow over the years for its ultimate use in retirement. You won't be subject to taxes, penalties, or other early withdrawal rules if you simply let time -- and compound interest -- take its course. 

If you do need the money early, you're able to withdraw IRA contributions (depending on the account type) and in some cases even take short-term loans from your IRA. But again, this is not the intended purpose of the account, and you'll face far fewer obstacles if you leave the account alone.

One of the best ways to handle this is to make a lump sum contribution to the account, invest the money, and don't look at it again until the following year when it's time to make the next contribution. Alternatively, you can make monthly contributions to your IRA and use the same strategy between contributions. If you can automate the process, even better. 

Pick the low-hanging fruit

IRA management doesn't need to be complicated. Be sure that you're actively taking care of the little, easy things you can do that make a big difference over time. Also remember that this shouldn't be in any way costly or time-consuming; rather, it should be fairly seamless to get your IRA picture in order. Pay attention to the important details and get the basics right -- your future self will thank you. 

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