The Roth IRA (individual retirement account) is a one-of-a-kind retirement goodie that's too good to pass up, especially if you think you'll be in a higher tax bracket later.
It's a way to set yourself up for a stream of tax-free income during retirement. The money can also be used to pay for college expenses or a first-time home purchase without triggering penalties.
As alluring as the Roth IRA benefits are, you won't unlock the full power of the account if you fail to make contributions every year. You should also aim to contribute more than scraps of cash every year if you want to look out for your future self. Maxing out your Roth IRA is your best bet if you want to multiply your rewards during retirement.
If you have no idea how to crush your goals, here's the game plan you need to easily max out your Roth IRA this year.
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The Roth IRA advantage
Every penny you contribute to a Roth IRA today can bring you one step closer to a sizable nest egg during retirement. That's because tax-free growth and withdrawals can boost how much is available for you when you retire. All your future tax liabilities will be wiped away because you paid your tax tab up front when you contributed to a Roth IRA.
Unlike a 401(k), you don't have to worry about pulling money out at a certain age, because there are no required minimum distributions. However, you'll have to wait until you're 59 1/2 and have satisfied the 5-year-rule to withdraw all your money tax-free. There are exceptions that allow you to use funds to buy a home or pay for college without incurring a penalty.
If you want to take advantage of these benefits, contribute as much as possible to your Roth IRA while you're eligible. Once your income climbs past the limits, you'll have to say goodbye to direct contributions to a Roth IRA.
Start with the contribution limits
Before we get into the contribution game plan, let's set realistic expectations. You can't contribute endless amounts of money to the Roth IRA. The IRS limits contributions to $6,000 for individuals under 50 and $7,000 for individuals 50 and over for 2022.
If you plan to take a break in 2022 and don't plan to earn at least $6,000 for the year, you won't be able to contribute the maximum amount to a Roth IRA. Your contribution will be limited to your earned income for the year. Let's say you earn $4,000 in January and don't earn any additional money for the rest of the year. The maximum amount you can contribute to your Roth IRA is $4,000.
Your 2022 Roth IRA contribution plan
Although the thought of contributing the maximum amount to a retirement account can seem intimidating if you're just getting started, it's doable if you set yourself up for success now.
First, plan ahead. Benjamin Franklin gets credit for saying, "if you fail to plan, you are planning to fail." That statement applies to your financial goals.
If you want to contribute $6,000 to a Roth IRA, think about the different ways you can accomplish your goal. You can take the slow and steady approach by contributing $500 every month for 12 months. Or you can contribute more at the beginning of the year so that you can allocate funds toward another goal toward the end of the year. If you expect a work bonus, you can use some of that money toward your Roth IRA contributions. You can also allocate funds from your side gig to your Roth IRA to max out your account faster.
Put your contributions on autopilot
After you decide your contribution goals, you can automate your success. The last thing you need to worry about is manually depositing money into your Roth IRA every month.
Set up recurring contributions to your Roth IRA so you beef up your retirement savings without even thinking about it. This process works even better if you have a special checking or savings account for your investments. That way, you don't have to worry about overdrafting your account because you spent money on last-minute shopping needs.
The power of maxing out your Roth IRA
Maxing out your Roth IRA contributions is one surefire way to become the millionaire next door, so long as you start early enough. You'll also need to be disciplined and focused to avoid squandering your money away on unnecessary items. If your future self is important to you, you'll enjoy maxing out your Roth IRA. It's another step on your journey that can get you one step closer to unraveling your million-dollar treasure later.
