Retirement · April 22, 2021

How to Max Out IRA Contributions Every Year

Investing in retirement accounts is essential to securing your financial future and ensuring you and your loved ones will enjoy a good quality of life when you leave the workforce. Knowing how to invest and when, however, can be challenging.

One way to build wealth for retirement is to max out your IRA contributions for the year. Before you begin, it's important to consider what type of IRA makes the most sense for you and when you should invest most aggressively.

Know your IRA contribution limits

The IRS sets IRA contribution limits, and they can change from year to year. The maximum amount allowed in 2021 is $6,000 if you're under 50, and $7,000 for folks who are 50 and older. Keep in mind that these numbers refer to total contributions. That means if you have a traditional IRA and a Roth IRA, your combined contributions can't exceed $6,000 or $7,000, depending on how old you are.

You can also create IRAs for your spouse, even if you're the one funding the account. However, they're subject to the same contribution limits. So, if you're both under 50, your maximum combined contributions can't be more than $12,000. If you're both over 50, the maximum is $14,000. If you contribute more than the allowed amount, the IRS may charge you a fine.

Because of the annual limits, you might want to invest more in one type of IRA than the other. Maxing out Roth IRA contributions may be the best plan if you expect to be in a higher tax bracket when you retire. The IRS collects taxes on Roth IRA contributions the year that you make them, which means you won't owe taxes when you withdraw your earnings in retirement.

It's the opposite with a traditional IRA. You'll pay taxes when you make withdrawals from a traditional IRA, so if you expect to be in a lower tax bracket in retirement than you are now, you may want to invest more heavily in that account than a Roth one.

Whether you plan to max out your IRA or make smaller contributions, you have until Tax Day of the following year to do so. That means you can make 2021 contributions until April 15, 2022.

Why max out IRA contributions?

The top reason to max out your IRA contributions is to earn as much money as possible on your investments before you retire. Of course, finding $6,000 to $7,000 a year to invest may seem daunting, especially if you're also enrolled in a 401(k) or other investment plans.

You don't need to invest all at once, though. Rather than maxing out your contributions in a hurry before the annual deadline, you can schedule automatic investments or create a 12-month plan for hitting your maximum allowed amount.

Maxing out Roth IRA or traditional IRA contributions can pay off substantially by the time you're ready to leave the workforce, especially if you invest during a down market, when your contributions may go farther. As the market rebounds, your returns will grow.

Markets fluctuate over time, which means the value of your investments will as well. But investing consistently during your working years generally leads to increased savings and steady investment income in retirement.

How to fund IRA contributions

Saving for retirement is important, but you shouldn't max out IRA contributions at the expense of other priorities. Instead, work out a monthly budget to determine how much you can reasonably afford to contribute. Factor in living expenses, building an emergency fund, other investment accounts and short- to medium-term financial goals. You don't want to put more into your IRA than you can afford, because except in specific cases, you'll pay a penalty if you take early withdrawals.

Making regular investments is a great way to ensure that you're saving consistently, but it's not the only option. If your regular income doesn't allow you to max out your contributions, look to windfalls to supplement your investments. A tax refund, work bonus or large commission is a great way to boost your IRA contributions. Our IRA contribution calculator can show you how much a single lump-sum investment will grow over time.

If you prefer to take a set-it-and-forget-it approach to your finances, you can set up automatic contributions to your IRAs. That way you know you're building your retirement fund without having to actively manage it. You can also work with your banker to determine the best type of investments and how much you can afford to contribute regularly.


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