How Much Should You Save in Your IRA in 2022?

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KEY POINTS

  • In 2022, IRA contributions max out at $6,000 for savers under 50 and $7,000 for those 50 and over.
  • Maxing out your IRA is a smart bet, but only if you're set on emergency savings.

It pays to max out if you can -- but only once you've saved for your near-term needs.

It's a good idea to save consistently for retirement throughout your career. You'll need savings to supplement your Social Security benefits when you're older and are no longer working.

If you don't have access to a 401(k) plan for retirement savings, you can open an IRA and save for retirement there. In 2022, you can contribute up to $6,000 to an IRA if you're under the age of 50, and up to $7,000 if you're 50 or older. Generally speaking, it pays to do your best to hit these maximum limits if that's possible.

But in some cases, it actually doesn't pay to max out an IRA. Here's how to know what to do.

What does your emergency fund look like?

While saving for retirement is no doubt important, your first financial priority should be to have a complete emergency fund. Generally, that means having enough money available in your savings account to cover three to six months of essential living expenses.

If your emergency fund isn't complete, then you actually shouldn't max out your IRA in 2022 until you've saved enough to pay for at least three months of essential bills. The reason is that you can't take an IRA withdrawal without penalty to cover an emergency expense, so you shouldn't rely on that retirement plan for near-term needs. And since you have your whole life to save for retirement, you're better off covering yourself for emergencies first and then focusing on retirement savings.

Of course, if your emergency fund is solid going into 2022, then there's no reason not to aim to max out your IRA contributions if that's possible based on your income. And if it's not, that's okay. Not everyone can part with $6,000 to $7,000 of earnings, so if you're in that boat, do your best to save as much as you can. Keep in mind that if you're saving in a traditional IRA, the more money you contribute in 2022, the less of your earnings the IRS will tax you on, as long as you qualify under the deduction limits.

One exception to the rule

While it's a good idea to prioritize your emergency fund over your retirement savings, if you have access to a 401(k) plan through work, and your employer offers a matching program, you may want to first contribute enough to snag your free cash and then put money into your emergency fund. Say you're given $2,000 a year from your employer if you put that much of your own money into your 401(k). If you don't make that contribution, that's a lot of money to give up.

Now, say you put that $2,000 into your 401(k) over your emergency savings and run into a $2,000 surprise expense. You may then have to take a $2,000 withdrawal from your 401(k). If so, you'll face a 10% penalty on that sum, which amounts to $200. But in that case, you'll still be up $1,800 for having received $2,000 as a match from your company.

IRAs, however, don't offer matching programs. If you're saving for retirement in an IRA, the above advice holds -- first complete your emergency fund, and then put your remaining dollars into your IRA. And if that means being able to max out in 2022, that's a great step toward securing your financial future.

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