IRAs: How to Maximize Your Contributions with Proper Planning
An Individual Retirement Plan (IRA) is a retirement fund that allows your money to grow, tax-deferred. Managing your account effectively takes careful planning and basic knowledge of retirement accounts, as well as their contribution limits. Let’s take a look at IRAs and how to maximize your contributions with proper planning.
What are the two primary types of IRAs?
When opening an IRA, you can choose between a conventional IRA or a Roth IRA.
A conventional IRA lets your money grow tax-deferred, but withdrawals are taxable. Contributions to a conventional IRA can reduce the adjusted gross income (AGI) by a dollar-for-dollar amount for qualified taxpayers. They can be a great choice for individuals who anticipate being in a better financial place upon retirement than they are now.
Roth IRAs do not feature tax-deferred growth as contributions are funded with after-tax income. This means that contributions to Roth IRAs do not not lower your AGI. However, withdrawals are not subject to tax, making these accounts a great choice for individuals who prefer to have the full withdrawal amounts upon retirement.
IRA Contributions
You can fund your IRA with cash or cash equivalents. You cannot transfer any other asset to your IRA. Doing so can disqualify the account from any tax advantages. Rollovers, transfers and conversions between IRAs and other retirement accounts can include any asset.
Contribution Limits
The IRA establishes limits for IRA contributions with each calendar year. For 2022, the contribution limit for traditional IRAs is $6,000, with an additional $1,000 catch-up for taxpayers age 50 and over. For 2023, the limit increases to $6,500, with a catch-up contribution of $1,000 for taxpayers aged 50 and over. The contribution maximums apply collectively to all IRAs a taxpayer might own.
The IRS imposes penalties on contributions that exceed the permitted amount.
Contribution Deadlines
The cut-off date for making contributions to a traditional IRA and receiving a potential tax deduction is Tax Day, or the deadline for filing a tax return. Contributions can be considered retroactive for the previous tax year.
Maximizing Contributions
Follow these tips to maximize your IRA contributions:
- Stay in the know on changing contribution limits. Make sure you are always well-informed of the latest contribution limits for your IRA accounts so you can maximize your contributions.
- Set a savings goal. Setting a savings goal will give you a target to aim for and help you stay motivated. Start by determining how much you want to contribute to your IRA each year, then break it down into smaller monthly contributions. For example, if you want to contribute $6,000 per year, you would need to save $500 per month. Breaking it down into smaller, more manageable amounts can help you stay on track.
- Take advantage of catch-up contributions. If you are over age 50, you have an additional $1,000 to contribute to your IRA each year. Taking advantage of catch-up contributions can help you maximize your IRA contributions and make up for lost time if you haven't previously been able to save as much as you would have liked.
- Consider a spousal IRA. If you're married and one spouse isn't working, you can still contribute to an IRA for that spouse through a spousal IRA. The working spouse can contribute up to the annual limit for both their account and their spouse's account, thus doubling their annual contribution limit.
- Start early. The earlier you start saving for retirement, the more time your money has to grow. Starting early can help you maximize your IRA contributions and ensure you have enough money saved for a comfortable retirement.
- Take advantage of employer contributions. Many employers offer matching contributions, which is essentially free money. If your employer matches your contributions up to a certain amount, be sure to contribute at least that amount to maximize your contributions.
Remember, every dollar counts when it comes to saving for retirement. By following these tips, you can maximize your IRA contributions and ensure that you have enough money saved for a comfortable retirement.
Sources:
https://www.investopedia.com/articles/retirement/05/022105.asp
https://www.eicu.org/iras-maximizing-tax-deductions-with-proper-planning/