IRAs are popular because of the freedom they give you to invest your money how you want, but they have one drawback: their low contribution limits. In 2022, you're only able to contribute $6,000 to an IRA or $7,000 if you're 50 or older. And these limits apply to all your IRA contributions, not to each account individually.
Fortunately for savers, the IRS is going to allow you to set aside more money next year. Adults under 50 will be able to contribute up to $6,500 while those 50 and older can save up to $7,500. But that also means you'll have to work a little harder if you want to max your IRA out. Here are three tips to help you get there.
Image source: Getty Images.
Save raises and one-time gifts here
If you're expecting a raise in 2023, put the extra money you earn into your IRA if you're not already stashing it in a workplace retirement plan. You could also save year-end bonuses or even birthday and holiday money in your IRA as long as your annual income for the year matches or exceeds your total IRA contributions.
Just be sure to keep track of your contributions throughout the year so you don't put too much in your IRA. Making excess contributions results in costly penalties until you take the extra money out.
Take advantage of catch-up contributions if you're 50 or older
The additional $1,000 that adults 50 and older are able to contribute to IRAs in 2023 is known as a catch-up contribution. This is designed to help older adults who may have gotten a late start on retirement savings set aside more money each year.
An extra $1,000 might not seem like much, but that money will have more than doubled in 10 years if you earn an 8% average annual rate of return. If you contribute an extra $1,000 at 50 and retire at 70, that catch-up contribution would turn out to be worth $4,661 with an 8% average annual rate of return. And you could wind up with a lot more if you make catch-up contributions every year that you're eligible.
Get help from your spouse
As discussed above, you can't usually contribute to an IRA or Roth IRA unless you're earning income during the year. But there's an exception for married couples. As long as one spouse earns enough during the year to cover all contributions made to both spouses' retirement accounts, there's no issue. When a person contributes to their spouse's IRA on their behalf, it's known, fittingly, as a spousal IRA.
There's nothing special you have to do to make a spousal IRA contribution. As long as the couple earns enough money during the year, they can take money from their savings and deposit it in whichever partner's IRA they want. If they max out an IRA in each person's name, they can contribute up to $13,000 (or $15,000 if both people are 50 or older) in total.
It's OK if you aren't successful in maxing out your IRA in 2023. Even a smaller contribution can make a big difference to your retirement. And it's fine not to contribute to your IRA at all if you decide you'd rather save in a different account, like a 401(k). Just make sure you're setting aside money somewhere if you can spare it. Even if retirement seems a long way off, it'll sneak up on you faster than you expect.
