Contributing to a Roth IRA (individual retirement account) can be a smart way to ramp up your retirement savings. It's a nice addition to a 401(k), 403(b), and other employer-sponsored retirement plans. But the key to maximize your benefits is to contribute as much as possible before your window of opportunity expires.
If you want to tap into the power of your Roth IRA, here's a snapshot of the contribution limits and your future earnings potential. This will give you a better idea of how much you should tuck away in a Roth IRA for retirement this year.
In addition, consider these steps.
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Define your Roth IRA goals
The Roth IRA offers compelling features for those who qualify. You contribute after-tax dollars to the account, and enjoy tax-free growth and earnings when you turn 59 1/2. This means you can walk away with a $1 million Roth IRA without splitting any of your money with the government -- so long as you've satisfied all withdrawal rules.
You will need to set specific financial goals to avoid floundering on your Roth IRA journey. Here are some questions to consider:
- When do you want to retire?
- What do you want to invest in?
- What type of life do you want to live during retirement?
- What are you willing to do to achieve your goals?
The multiply by 25 rule can help you estimate the dollar amount you'll need to save for retirement. Let's say you'll need to withdraw $40,000 a year to fund your lifestyle. Multiply $40,000 by 25, and that comes out to $1 million. Depending on your age, contribution amount, and other factors, you may reach that goal in your Roth IRA alone before you retire.
Know the contribution limits
The IRS (International Revenue Service) sets contribution limits that cap how much you can sock away in a Roth IRA every year. These limits may make it more difficult to achieve your goal, but that doesn't mean your $1 million Roth IRA target is impossible.
For 2022, you can contribute up to $6,000 to your account if you're 49 and under. Once you hit age 50, the IRS will allow you to contribute an extra $1,000 to your Roth IRA. This is known as a catch-up contribution.
Next, we'll calculate how your contributions can get you to the million-dollar mark.
Calculate your future earnings potential
Let's say you start contributing to a Roth IRA in 2022 and consistently contribute $4,000 every year. If you're 21 years old and earn an average investment rate of return of 8%, you'll have a little over $1.03 million in your account before you turn 62 (which is also when you're eligible for Social Security).
However, if you consistently contribute at least $6,000 to your Roth IRA, you could end up with $1 million sooner. By the time you reach 57, you would have accumulated $1.03 million.
Play around with different investment return percentages and time frames to see what it would take to get to $1 million. If you contribute the maximum amount to a Roth IRA every year, you'll increase your chances of success. You'll also have more money available in your account to invest in your favorite assets, such as growth stocks, dividend-paying companies, or low-cost index funds.
Your 2022 Roth IRA contribution plan
Before you go all in with your Roth IRA, make sure you are not leaving money on the table anywhere else. For instance, if you have a 401(k) and your employer matches contributions, you should consider contributing enough money to get the full match.
After you've assessed your full financial situation, determine your contribution amount to your Roth IRA. You can break that amount up into several months to make your goal more digestible. If you decide to contribute $6,000, you can contribute $500 to your account for 12 months to achieve your goal.
Before you set your contribution goal, check to ensure your income for the year falls within the allowed range.
Turn your contributions into wealth
Every penny you contribute to your Roth IRA can get you one step closer to building wealth in your account. You may not become a millionaire overnight, but time and patience can help you supersize your returns.
When thinking about how much you should contribute to your Roth IRA, keep your future self in mind. Put yourself in a position to contribute as much as you can now so that you can live life on your terms during retirement.
