Though many workers are offered the opportunity to save for retirement in a 401(k), not everyone gets this option. Thankfully, those who don't can still build sizable nest eggs by saving in IRAs.
Unlike 401(k)s, IRAs aren't employer-dependent, and they tend to offer a wider range of investment choices. With 2017 rapidly coming to a close, here are a few key moves you ought to consider for your IRA.
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1. Ramp up your contributions
There's no such thing as having too large a nest egg in retirement, so the more you're able to contribute to your IRA during your working years, the better. Currently, workers under 50 can put up to $5,500 a year into an IRA, while those 50 and older are allowed up to $6,500 a year. Unfortunately, these limits aren't increasing in 2018, but that's still a pretty decent opportunity to build wealth over time -- provided you start fairly early in your career and max out, or get as close as possible to maxing out, year after year.
If you've been sluggish on your contributions thus far in 2017, now's the time to start ramping up, especially if you have an annual bonus or extra lump sum of cash coming your way. Not only will contributing more to a traditional IRA lower your tax burden for the year, but it'll also set the foundation for long-term growth that will come in handy once you're retired.
The following table highlights the importance of maxing out an IRA for as many years as possible:
|
If You Start Contributing $5,500 Annually to Your IRA at Age: |
Here's What You'll Have by Age 65 (Assumes a 7% Average Annual Return): |
|---|---|
|
25 |
$1.098 million |
|
30 |
$760,000 |
|
35 |
$519,000 |
|
40 |
$348,000 |
|
45 |
$225,000 |
TABLE AND CALCULATIONS BY AUTHOR.
As you can see, the more time you give your money to grow, the more you'll get to take advantage of compounding, so if you've yet to have a year in which you max out, make 2017 the first.
2. Check up on your investments
As mentioned earlier, one key benefit of IRAs is their range of investment options. But just because you're able to spread out your assets easily doesn't mean you shouldn't keep tabs on them. As 2017 draws to a close, take some time to review your investments' performance and make sure they're working for you. Also, do a review of the fees you're currently paying for your investments, and see if there's a way to lower those costs while maintaining the same level of returns you've come to enjoy. Index funds, for example, are notably cheaper than actively managed mutual funds, and they tend to perform better across the board.
3. Take your required minimum distribution
If you're on the hook for a required minimum distribution (RMD) this year, you'd better get moving on that withdrawal. RMDs apply to holders of traditional IRAs aged 70 1/2 and older. If you have a Roth IRA, there's no need to worry about RMDs.
Though the exact amount of your RMD will depend on your account balance and life expectancy, you can learn how to figure your specific number here. And it's critical to get that amount correctly, because if you neglect to take your RMD in full, you'll be penalized to the tune of 50% of the amount you fail to remove from your account. In other words, if your RMD for the year is $5,000 and you only withdraw $2,500, you'll be penalized on half of the remaining $2,500 and thus forfeit $1,250. Unless you happen to enjoy throwing money away, it pays to take that RMD before you run out of time.
Opening an IRA is one of the smartest retirement savings move you can make. That said, it's crucial to give your account the attention it deserves. Before the year is over, work on increasing your contribution level, review your investments, and be sure not to drop the ball on your RMD, assuming you're liable for one. If anything, it'll make for a great financial start to 2018.
