IRAs are valuable tools for retirement savings because they offer tax benefits in exchange for putting aside money for your golden years. Money Talks News’ recent article entitled “8 Ways to Maximize Your Traditional or Roth IRA” explains that contributions to IRAs are capped at $6,000 per year for most people, and that can make it difficult to amass the $1 million some people suggest is needed for retirement. Nonetheless, you can maximize your IRA contributions – both this year and over time – by using these ideas.
- Know your IRA options. See if you’re eligible to open a specialized IRA with a higher contribution limit. Self-employed people can also contribute to a SEP IRA. These Simplified Employee Pension plans let workers save 25% of their compensation.
- Don’t forget about the catch-up contributions. When you reach 50, you’re eligible to make catch-up contributions to traditional and Roth IRAs. It’s another $1,000 a year. Therefore, everyone age 50+ can contribute a total of $7,000 to their IRA for 2022.
- Take advantage of a spousal IRA. You typically need to earn taxable income to contribute to an IRA. However, there’s an exception for spouses. A non-working spouse can set up and contribute to an IRA, as long as their spouse has taxable income. However, if you file your taxes separately, you’ll miss out on this opportunity. Your total IRA contributions also can’t exceed the taxable income reported on your joint return.
- Make regular contributions throughout the year. If you wait for a year-end bonus to make your annual IRA contribution, you might be shortchanging yourself. Try to make small monthly contributions. Known as dollar-cost averaging, this makes saving money a habit and can result in more efficient investments. It may help your IRA grow more quickly.
- Start contributing as early as possible. It’s never too early to begin saving for retirement, so open an IRA as soon as you’re able and start your deposits as early in the year as possible.
- Look into a Roth conversion. Both traditional and Roth IRAs offer tax advantages. However, they differ. A traditional account offers an immediate tax deduction on contributions and then taxes withdrawals in retirement as regular income. With a Roth, there’s no tax deduction for contributions. However, the money is tax-free in retirement. If you have a traditional IRA, you can convert it to a Roth account.
- Invest for the long term. As far as your money in your IRA, “set it and forget it.” Moving it around frequently could incur fees and selling off investments during a down market simply means you’ll be locking in losses. Determine the appropriate investment strategy for your goals and risk tolerance and then stay with it. And remember that you may have to ride out some short-term bumps in the market to maximize your long-term gains.
- Talk to an expert. For savvy investors and those with the time and inclination to research investment choices, managing an IRA can be a viable option. For others, using a professional can save time and may result in better returns.
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