One of the best ways to invest for retirement is to take advantage of the Roth IRA. The Roth IRA is a tax-advantaged retirement account that allows you to enjoy tax-free growth. You contribute money to the account after you’ve already paid taxes (so no tax deduction for contributions), and your investments grow tax-free. When it comes time to retire, your withdrawals aren’t taxed. This great advantage can help you enjoy better tax efficiency — especially if taxes go up in the future, or if you retire in a higher tax bracket.
In order to take full advantage, though, you should consider maxing your contributions to the Roth IRA each year. The more you contribute, the better compound interest works on your behalf, and the greater your tax-free earnings. Each year the contribution limits are reviewed, and they can be adjusted. Double check the limits each year, and determine what you need to do in order to max out your contributions.
Looking for Money for Your Roth IRA
In order to max out your Roth IRA, you need to find the money to contribute. First, determine how much you need to set aside each month to max out your Roth IRA. If the limit is $5,000 for the year, you need to contribute about $416.66 each month to max out your contribution. Here are some ways to help you reach your goal:
- Cut out some of your expenses: Review your expenses, and look for things to cut from your budget. This will free up the money you need to contribute. When you know how much you need to contribute each month, it becomes easier to pinpoint areas of financial waste.
- Make it automatic: One of the easiest ways to do this is to have the money automatically withheld from your paycheck, or automatically transferred from your bank account. If your employer allows you to, set up direct deposit from your paycheck into your Roth IRA. You’ll adjust to how much money you’re bringing home, and eventually never notice the money is gone. If you can’t use direct deposit, have the money automatically transferred from your bank account the day after your paycheck is deposited. Make sure that this is done first, and you’ll be in better shape down the road.
- Work up to it: For some, simply starting out by maxing out Roth IRA contributions isn’t practical. You can work up to it though. Make a plan so that each month you contribute a little more, until you are contributing the monthly amount you need to max out for the year. On years that there is an increase in possible contributions, figure out how much extra you need to add in order to be back on track to max out your account.
- Increase your income: Another option is to find ways to increase your income. If you need an extra $300 a month to meet your goal of maxing out your Roth IRA, look for a way to earn that money. You can pick up an extra shift at work, or you can start a small side hustle.
Maxing out your Roth IRA is a great way to build your nest egg. The earlier you start, and the more you put in, the better off you’ll be. To raise awareness of the Roth IRA, this post is part of the Roth IRA Movement.