It's that time of the year again when goal setting takes center stage. While you're thinking about your career, health, and lifestyle goals, don't dismiss the power of retirement planning. It might not be the most ravishing goal to pursue in 2022, but the rewards can set you up for a financially secure retirement.
One way to crush your long-term goals is by contributing money to tax-advantaged retirement accounts, like a Roth IRA (individual retirement account). It's a rock-star retirement account for a reason. You can pay your tax bill upfront in exchange for tax-free growth and withdrawals after you meet the eligibility requirements. If you accumulate $1 million in your account, you can withdraw 100% of the money without splitting your earnings with the IRS.
Starting early is key to accomplishing your long-term retirement goals. Here are four things you can do in 2022 to achieve your Roth IRA goals.
1. Set your intentions
Let's face it: Saving money can seem like a mundane task if you're not clear why you are doing it. That's why it's important to set your intentions. If you're thinking about contributing to a Roth IRA, identify your long-term goals and determine how this account can get you to the finish line.
Here are a few questions to ask yourself to get you started on the path to success in 2022:
- What are your long-term goals?
- How much money will you need to achieve your goals?
- If I contribute the maximum amount to a Roth IRA, how soon can I achieve my goals?
Also, it's important to work toward these goals now, because the Roth IRA may not be a perk that you can easily access forever. For example, if your income exceeds the threshold, you won't be able to make direct contributions to a Roth IRA.
2. Determine your contribution frequency
There are limitations to how much you can contribute to a Roth IRA. For 2022, the maximum amount you can contribute is $6,000 if you're under 50. You'll be eligible for a special $1,000 catch-up contribution after you turn 50.
Before you start contributing money to your account, set a contribution goal. Let's say you are feeling ambitious and want to max out your Roth IRA with $6,000. The good news is that you don't have to contribute $6,000 at one time. You can divide the total expected contribution amount by the number of months you plan to contribute.
If you want to contribute $6,000 within a 12-month period, that means you can contribute $500 every month. Break your contribution goal into weekly or monthly amounts to make the goal more achievable. Also, if you get a bonus at work or unexpected income during the year, consider allocating the money toward your Roth IRA goals if you've already taken care of your debt obligations and emergency savings.
3. Automate your savings
It's time to make your life easier in 2022. One way to do this is to automate your success. Instead of manually transferring money from your checking account to your Roth IRA, set up recurring deposits. This allows you to achieve your Roth IRA goal without even thinking about it.
If you are a big spender, it might make sense to open a separate account exclusively for your savings goal. That way, you don't commingle your spending money with your investing money. It also ensures that you'll always have money in your bank account to fund your Roth IRA goals.
4. Invest your money
Now that you have a plan to fund your account, to maximize your success, invest the money in your account in order for it to grow. If you don't, your Roth IRA becomes a glorified savings account, limiting your wealth-building potential.
Think about your age, goals, and risk tolerance to determine the best investments for you. You can look into exchange-traded funds (ETFs), growth stocks, or even dividend-paying stocks if you want an extra stream of income from your investments. Then, consider a dollar-cost averaging strategy to avoid a shock if the price of your shares drop after you purchase them.
2022 Roth IRA success plan
This is the year to set yourself up for success, both now and for the next 40 or so years.
Let's say you consistently contribute $6,000 to a Roth IRA and earn a 7% average annual return over 40 years. Your total contributions would be $240,000, but your investments will be worth more than $1 million. By taking action now, you can easily set yourself up for a handsome amount of tax-free earnings during retirement.