Contributing to a Roth IRA (individual retirement account) is a big deal, but maxing out your account can be the icing on the cake. Every penny you contribute to a Roth IRA gives you the opportunity to unlock more tax-free income during retirement. By starting early and maxing out your account every year, you could end up with a million-dollar Roth IRA without breaking a sweat.
If you've been having trouble maxing out your Roth IRA, here are some pointers to help you crush your goals in 2023.
Image source: Getty Images.
Know your contribution limits
Roth IRAs are attractive because they give you the flexibility to invest in individual stocks and collect tax-free income during retirement. But there's a limit to how much you can contribute to the account every year.
For 2023, you can contribute up to $6,500 to a Roth IRA if you are 49 and under. If you are 50 and over, you qualify for a special catch-up contribution of $1,000, bringing your total Roth IRA contribution cap to $7,500. But if your earned income for the year is less than the IRS annual contribution cap, your contributions will be limited to the amount of earned income you had during the year.
Let's say you are 45 years old and earned $5,500 during the year. Although the IRS contribution cap is $6,500, you won't be able to contribute more than your earned income, which is $5,500.
By contributing as much as possible to your Roth IRA now, you can withdraw all your earnings tax-free after you reach 59 1/2 and have met the requirements of the five-year rule. And maxing out your account can increase your chances of building a million-dollar Roth IRA to fund your future self.
Develop a contribution game plan
The window for 2023 Roth IRA contributions is from January 1, 2023 to April 15, 2024 (or tax filing deadline). If you don't want to wait until the last minute to achieve your Roth IRA goals, here are some contribution options you can consider.
- Contribute a fixed amount for 12 months. If you're 49 and under, you can contribute roughly $542 to your account every month to max out your Roth IRA within a year.
- Contribute a fixed amount for six months. If you want to reach your Roth IRA goals sooner, you can contribute twice as much money to your account every month. Socking away roughly $1,084 in your account every month will allow your contribution balance to reach $6,500 in six months.
- Allocate extra money you receive during the year to the account. If you expect to get a bonus or raise at work, you can consider adding that to your pot of Roth IRA funds. The money you earn from a side gig can also be used to fund your Roth IRA. If your income jumps beyond the Roth IRA limits for 2023, you won't be able to make direct contributions to a Roth IRA.
After you've figured out your contribution plan, you want to automate the process to make it easy to achieve your goals. Set up recurring deposits from a checking account to your Roth IRA weekly, bi-weekly, or monthly. You'll end up with a fully funded Roth IRA for 2023 without breaking a sweat.
Do a financial checkup
Before you hit the ground running with your Roth IRA game plan, it's important to assess your finances to minimize disruptions on your journey. Here are a few items you want to consider doing:
- Build your emergency fund.
- Pay off high-interest debt.
- Ensure you can manage your monthly obligations.
Your financial assessment may reveal that you need to increase your income, decrease your expenses, or tackle both simultaneously. If you're still building your emergency fund, maybe you want to start off with small contribution amounts every week, say $25, until you can beef up your contributions.
Get ready to max out your Roth IRA
If you plan to boost your income in the future, it's a good idea to start maxing out your Roth IRA now. You can sock away small amounts to the account now and raise your contribution every month until you reach your goal. You can also reach your target amount early by contributing more money to the account at the beginning of the year.
Maxing out your Roth IRA now will give your future self a chance to live out your most desired retirement dreams.
