Socking money away in an IRA is one of the best things you can do to prepare for retirement. Since you probably won't manage to cover all of your bills on Social Security alone as a senior, the nest egg you build could be crucial to covering your expenses and allowing you to enjoy retirement to the fullest.
Now that 2021 is coming to a close, it pays to spend a little time looking at your IRA and making changes as needed. Here are a few key moves to check off your list before the new year arrives.
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1. Max out your contributions
Maxing out a 401(k) is something that often can't be done on an average salary, since 401(k)s let you put in up to $19,500 this year if you're under 50 or $26,000 if you're 50 or older. But the annual contribution limits for IRAs are much lower -- $6,000 for workers under 50 and $7,000 for those 50 and over. And so if you haven't maxed out your IRA in 2021, now's the time to start pumping more money into your account.
If you're saving in a traditional IRA, the more money you put in, the less taxable income you'll have for 2021. And while you can technically fund your 2021 IRA up until next year's tax-filing deadline in mid-April, you may want the peace of mind of having finished contributing by December 31.
2. Review your investments
If you want your IRA to deliver solid returns, it pays to go heavy on stocks. That doesn't necessarily mean you need to buy individual stocks. If you're not comfortable choosing those yourself, you could revert to index funds instead.
But either way, you'll want to make sure your retirement plan is invested aggressively enough to generate decent growth. And also, you'll want to make sure it's invested appropriately given your age. If retirement is nearing, you may actually need to scale back on stocks and shift some investments toward bonds. But if you're not planning to retire within the next 10 years, stocks are still the way to go.
3. Consider a Roth
It's easy to see why savers like traditional IRAs -- it's nice to get an immediate tax break on your contributions. Roth IRAs don't offer that perk, but what they do offer is an opportunity to enjoy tax-free growth in your retirement plan and tax-free withdrawals once your senior years roll around.
Saving in a Roth IRA is also a good way to protect yourself against future tax hikes. We may know what tax rates look like right now, but who's to say what rates will look like in 20 or 30 years? A Roth IRA lets you mitigate that risk. And, Roth IRAs are the only tax-advantaged retirement plan to let savers off the hook when it comes to required minimum distributions.
Right now, a lot of us are gearing up for the holidays and wrapping up year-end matters. As you do the same, take a little time to give your IRA a closer look -- and make sure it's set up to do a great job of helping you secure the retirement of your dreams.
