A Roth IRA is a superb tool for building wealth in retirement. Since you fund it with money you've already paid taxes on, you get unlimited tax-free growth. That's a pretty generous deal. So it's not surprising that the IRS sets strict limits on how much you can contribute during a tax year.

If you have extra money available, you may be wondering: Should I max out my Roth IRA in 2022? In most cases, funding your Roth IRA up to the annual limit makes sense, but there are a few scenarios where you might want to hang on to your cash.

A group of people holding up drinks to celebrate the new year.

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The rules for funding your Roth IRA

First, if you're undecided about whether to max out your Roth IRA contribution for 2022, you have some breathing room. The deadline for contributing is Tax Day, which means you have until April 18, 2023, to fund your Roth IRA for 2022.

In 2022, you can contribute up to $6,000, or $7,000 if you're 50 or older. Those limits rise to $6,500 and $7,500, respectively, in 2023. Your contributions can't exceed your earned income (money you earn from working) in a given year. So if you only earned $5,000 in 2022, you can't contribute more than $5,000. If your income exceeds the 2022 limits of $129,000 (single filers) or $204,000 (married couples filing jointly), you won't be able to make the full direct contribution, though you may be able to use a backdoor Roth IRA strategy

Why now could be a great time to max out your Roth IRA

2022 was a turbulent year for the stock market. The S&P 500 index, which accounts for roughly 80% of the U.S. stock market, is down about 20% year to date, while the tech-heavy Nasdaq Composite index tanked by over 33%. So it's understandable if you're hesitant about maxing out your Roth IRA right now.

Investing in a down market may be nerve-wracking, but that's exactly what savvy investors do. You'd rather make a purchase at a 20% discount instead of paying full price, right? Of course, it's possible that stocks could drop even more in the short term.

But history tells us that if you stay invested regardless of market conditions, your chances of success are overwhelmingly high. Between 1928 and 2018, the odds of earning positive returns in a year were 73%. But the odds of positive returns increased to 93% over any 10-year stretch. And never once would you have lost money had you kept your money invested over 20 years.

Given the high likelihood of success, taking full advantage of your Roth IRA makes sense, especially if you're a young investor. You can lock in the certainty of today's tax rates. There's no limit to how much your money can grow, completely tax-free.

Though you can wait until Tax Day to max out your Roth IRA, you probably don't want to delay if you can afford to invest now. Generally, the rule is that time in the market beats timing the market. In other words, no one can predict short-term stock market movements, but the longer your time horizon, the higher your odds of success.

So if you're planning to max out your 2022 Roth IRA contribution, why not do it now and give your money an extra three and a half months to grow?

When you shouldn't max out your Roth IRA

Maxing out a Roth IRA is usually a smart move, but here are a few situations where you might want to avoid doing so:

  • You don't have an emergency fund: If you don't have a six-month emergency fund, consider keeping your extra money in a high-yield savings account. Once you're prepared for an emergency, you can prioritize Roth IRA contributions.
  • You have credit card debt: Annual stock market returns vary widely, but the average is about 10%. Meanwhile, the average credit card interest rate was 16.27% as of August 2022, according to the St. Louis Fed. If you carry a credit card balance or have other high-interest debt, focus on paying it off before you stash money in a Roth IRA. That debt is costing you more than you'd earn during an average year in the stock market.
  • You want a tax break now: A Roth IRA will never lower your tax rate for the current year. However, you may be able to deduct contributions to a traditional IRA, depending on your income and whether you or your spouse are covered by a workplace retirement plan.
  • You need your money in the next couple of years: If you're planning to use your money for a big purchase in the next year or two, consider putting your money in a bank account or certificate of deposit. Though it's possible to withdraw your Roth IRA contributions tax- and penalty-free at any time, it's best to avoid investing money that you'll need to spend soon because of the potential for short-term stock market volatility.