IRAs are an important tool for retirement savings, and as the end of the year approaches, it's time to pay yours some attention. Here are a few key IRA moves to make in the next few weeks.
1. Max out your annual contribution
The more money you put into your IRA, the more you stand to retire with. It's that simple. And if you're saving in a traditional IRA, as opposed to a Roth, ramping up your contributions means saving more money on taxes at present.
For 2019, you can contribute up to $6,000 to an IRA if you're under 50, or up to $7,000 if you're 50 or older. Incidentally, these limits are holding steady going into 2020, so you can aim for the same total two years in a row.
Because IRAs have much lower annual contribution limits than 401(k) plans (which currently stand at $19,000 for workers under 50 and $25,000 for those 50 and over), maxing out is more feasible, so if you're sitting on a year-end bonus from work or a pile of generous holiday cash gifts from family members, it pays to consider putting that money into your IRA.
And to give you a sense of the tax savings involved, let's assume you fall into the 24% tax bracket based on your income. If you're under 50 and max out your IRA at $6,000 this year, the IRS won't be able to tax you on $6,000 in earnings, and so you'll effectively save $1,440.
2. Review your investments
The end of the year is a good time to take a look at how you have your IRA invested and see if changes are in order. For one thing, you'll want to make sure your investments are performing decently. If not, make changes -- the great thing about IRAs is that they give you a lot of investment choices (more variety than 401(k)s typically offer), so there's no sense in sticking with a bum selection. And if you're getting closer to retirement, start thinking about shifting toward safer investments, like bonds.
3. Take your required minimum distribution
If you're 70 1/2 or older and are housing your retirement savings in a Roth IRA, you don't need to worry about required minimum distributions, or RMDs. But if your money is in a traditional IRA, you're required to withdraw a portion of your account balance year after year or risk forfeiting a chunk of your savings.
Your annual RMD is a function of your savings balance coupled with your life expectancy, and if you don't take it in full, you'll lose 50% of your non-withdrawn funds to the IRS as a penalty. In other words, if you're looking at a $6,000 RMD and you don't take any of it, you'll end up giving the IRS $3,000 for no good reason. Your initial RMD must be taken by April 1 following the calendar year when you turn 70 1/2, but all subsequent RMDs are due by year's end, so don't let 2019 close out without taking your money.
The savvier you are about managing your IRA, the better it'll serve you. Whether you're still working, about to retire, or already retired and taking withdrawals, pay some attention to your IRA before 2019 wraps up.