Contributing money to a 401(k) and Roth IRA (individual retirement account) can be your golden ticket to a rewarding retirement. However, most people don't get a crash course on retirement savings and have no idea how to develop their success plan.
If you're ready to move to the next level in your financial journey, here are some pointers to help you make the most of your retirement accounts.
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Maximize your 401(k) contributions
Your company's 401(k) plan may be the easiest way to ramp up your retirement savings this year. In 2022, individuals under 50 can contribute up to $20,500 to their 401(k) plans, thanks to the new inflation-adjusted contribution limits. If you're 50 or over, you can throw in an extra catch-up contribution of $6,500, increasing your maximum contribution limit to $27,000.
Maxing out your 401(k) may sound ambitious, but it's possible -- if you break it down into bite-sized action items. You may want to consider accomplishing the following goals first, which can help you to contribute to your 401(k) with ease:
- Pay off high-interest-rate debt.
- Develop a comfortable emergency fund.
- Have adequate insurance.
Review your income and expenses every month. Determine if there are ways to increase your income, decrease your expenses, or both. If you can find ways to save additional money each month, contributing to a 401(k) won't hurt your short-term financial goals.
Assess your financial situation and determine what you can realistically do. Don't cheat yourself out of a comfortable retirement because of any mental limitations you may have. For example, if you want to contribute $20,500 to your 401(k), just tuck away a little less than $400 a week. That's less than $60 of savings every day.
Let's say you have a bonus coming your way from work. You can ask your employer to allocate a portion of the cash to your 401(k). That will reduce the amount of money you need to have deducted from your regular paycheck during the year.
Decide what you can contribute to your 401(k) and position your life in a way that allows you to comfortably achieve your goal. Since 401(k) contributions are an automatic payroll deduction every two weeks, you probably won't even miss the money.
Don't miss out on the Roth IRA
The Roth IRA is one of the most coveted retirement accounts in existence, and there are tons of reasons why people flock to this golden goodie. After you contribute post-tax dollars, you're in the driver's seat of your money and can buy investments that grow tax-free. The most captivating perk may be the ability to withdraw all the funds in your account 100% tax-free during retirement.
Many people rely solely on their employer-sponsored retirement plans to cover their retirement lifestyles. However, that may not be enough to build a sizable nest egg that aligns with your goals. As long as you meet the income requirements, contributing to a Roth IRA can get you one step closer to your retirement goals.
In 2022, those with incomes under the limits can contribute up to $6,000 to a Roth IRA if they're under 50. The contribution limit goes up to $7,000 after you turn 50. If you contribute around $500 a month or $125 a week to a Roth IRA, you can max out your account within 12 months.
Develop a "set it and forget it" strategy to help you achieve your goal. For example, you can set up automatic transfers from a checking account to a Roth IRA to put your contributions on autopilot.
You'll have until April 15, 2023 to contribute to a Roth IRA for 2022. If you need to take care of other financial obligations now, you'll have time to work toward your Roth IRA goals later in the year.
Unlock the power of your retirement accounts
Your 401(k) may be your first savings vehicle to help you plan for retirement. However, that doesn't have to be your only savings tool. The Roth IRA can be a great companion to your 401(k) and help you get one step closer to your retirement savings goals.
If you want to max out your 401(k) and Roth IRA, you have to believe it's possible for you, and then develop a plan of action. Even if you can't contribute as much as you want to now, you'll have something to aspire to next year. The goal is to leverage the 401(k) and Roth IRA as much as you can now to set yourself up for a financially secure lifestyle during retirement.
