If you've been wanting to max out your Roth IRA (individual retirement account), this may be the perfect year to give it a shot. All you have to do is set up a game plan and put your contributions on autopilot. The best part is that you can get closer to your goals with only $25 a day, so you don't have to worry about sacrificing your lifestyle.
We'll break down the secret sauce for maxing out your Roth IRA if you're under 50.
Open a Roth IRA if you haven't done so already
Let's get the ball rolling by opening a Roth IRA. You can compare the sign-up incentives and costs, as well as the research and resources offered by different financial institutions. After you've settled on a custodian, it shouldn't take more than 20 minutes to open your account.
You want to make sure you qualify to make direct contributions to a Roth IRA this year, before you start your $25-a-day game plan. You'll need earned income for the year to make contributions, but you'll be penalized if you contribute too much money to the account.
If you're under 50, your contributions are capped at $6,000. Your personal contribution limit may be less, depending on your income. Your modified adjusted gross income (MAGI) is the magic number you need to keep your eyes on.
As soon as your income hits $129,000 (single) or $204,000 (married), you enter the danger zone, better known as the phaseout range. Your maximum contribution limit drops when you are within this range. When your income tips over the upper limit, you won't be able to make direct contributions to a Roth IRA. Contribute as much as you can while you qualify, so you can build up a portfolio of assets that you can withdraw 100% tax-free when you hit 59 1/2.
Here are the 2022 phaseout ranges.
2022 Phaseout Income Range
2021 Phaseout Income Range
Single or head of household
$129,000 to $144,000
$125,000 to $140,000
Married filing jointly
$204,000 to $214,000
$198,000 to $208,000
Set up your Roth IRA contribution plan
Now that you've checked the box on the qualifications, it's time to maximize your account by funding it. If you're aiming to stash $6,000 into the account, here's the game plan:
- Determine your time horizon. If you have 12 months to contribute $6,000, that breaks down to $500 per month.
- If $500 sounds like too much to contribute every month, you can chop your goal into bite-sized actions. In order to reach that monthly goal, you have to set aside $125 every week. Let's say you earn $25 per hour. You can allocate five hours of earnings to your Roth IRA to reach your weekly goal.
- If you want to slice your monthly contribution amount into days, that comes out to $25 a day for five days a week.
- Get a handle on your expenses so that you can remove anything you're not using or don't need. As you reduce your expenses, you'll have more money available to save.
Develop another contribution plan if you start later in the year
If you don't have 12 full months left to contribute to your Roth IRA for the current year, you can start with a lump sum amount for the months you missed and then proceed with the $25-a-day game plan.
Let's say you start your contribution plan in June. You have until the tax deadline of the following year to make prior year contributions. Here's a sample game plan that allows you to tuck away $25 a day for five days every week (after you make your lump sum contribution):
- June: $1,000
- July: $500
- August: $500
- September: $500
- October: $500
- November: $500
- December: $500
- January: $500
- February: $500
- March: $500
- April: $500
Put your contributions on autopilot so you won't be tempted to interfere with the plan. You can have $25 a day sent to a checking or savings account, and then set up monthly recurring deposits for $500 from your funding account to your Roth IRA. Before you know it, your Roth IRA will be maxed out, and you'll be able to invest in your favorite assets.
Your contribution goals are within reach
By starting with $25 a day, you can crush your Roth IRA goals with ease. All you have to do is break down your larger goals into bite-sized pieces. Instead of putting all the work on your future self, you can take daily steps toward the goals you want to achieve.