How Much Can I Contribute to My IRA – and When?


Traditional IRAs are a great way to save for retirement because they give you tax relief for doing so. It is essentially a reward for taking care of your future self. Roth IRAs are another great way to save, but the tax benefit is delayed – all of your money grows tax-free and comes out tax-sheltered in retirement.

But how do you maximize the benefits of an IRA? Here’s how much and how often to contribute to your traditional or Roth IRA.

How Much Can I Contribute to My IRA?

The IRA contribution limit is $ 6,000 in 2021 ($ 7,000 if 50 or older).

However, the real world is usually not that simple. You can have a limited amount of money and you can have a retirement plan at work.

The good news? IRA can complement worktops such as 401 (k) s, or fill them out if your employer does not offer one. Here’s one way to think about sharing your money:

  • Contribute enough to your 401 (k) pension plan or other pension plan to get the full business consideration. It’s free money, sometimes dollar for dollar up to a specific percentage of your salary. You don’t want to lose it.

  • If your 401 (k) offers a good variety of low-cost investments (a mutual fund expense ratio of 1% or more is a red flag), you could invest as much money as possible. The annual maximum is $ 19,500 for 2021 ($ 26,000 for those 50 and over).

  • But if your 401 (k) isn’t great, focus on maximizing your Traditional or Roth IRA.

  • If you have enough money to keep going over your preferred account limits, then max out your second choice.

This assumes that you have already chosen between a Traditional IRA and a Roth IRA. Traditional IRAs offer tax-deferred growth – you pay taxes when you withdraw the money. Roth IRAs, which you put money into after-tax, offer tax-free growth on investment income.

There is income restrictions on IRAs, which can reduce or eliminate the tax deduction you can get for your traditional IRA contributions. They can also reduce or eliminate your ability to make Roth IRA contributions.

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When should I contribute to my IRA?

If you have the money on hand, then contributing the maximum amount at the start of the year means that your money has the most time to earn returns.

By contributing the maximum amount at the start of the year, your money has the most time to generate returns.

“There’s a good chance you’ll get a tax-deferred or tax-exempt year of growth rather than wait until year-end or April 15,” says Rick Kahler, Certified Financial Planner and Founder of Kahler Financial Group in Rapid City, in the south of the country. Dakota.

You can only contribute as much as you earn in a given year (up to the standard contribution limit), but you don’t have to wait until you earn the money, Kahler says.

“Say all your money is coming in December. You can make the contribution in January as long as you have the funds to do so. The IRS reviews this every year, ”he says.

If you’re more of a procrastinator, you can contribute to an IRA as late as the tax filing deadline of the following year.

But I don’t have enough to maximize an IRA!

For many people, contributing the annual maximum to their IRA at one time is difficult. The best thing to do is to set up automatic payments that regularly transfer money from your bank account to your brokerage account, for example every two weeks or once a month.

Another advantage is the setting up of periodic contributions. You adopt the practice of “the average cost in dollars”. This is when you buy investments in small, periodic installments, rather than a large lump sum.

Doing so means you are buying no matter what the market is doing, and over time the variations get smaller.

“It’s the opposite of market timing,” says Patrick Meyer, CFP and director of wealth management client services at Unified Trust Company in Lexington, Kentucky.

Market timing is all about trying to figure out the best time to buy, which is when prices are low. The problem with market timing is that it’s impossible to know what the market will do tomorrow, so you never know if you timed correctly.

If the timing of the market was easy, Meyer says, “everyone would do it.”

Why should I contribute to my IRA?

If you have the time to let your investments grow, then even a few years of maximizing this IRA contribution can help you achieve retirement success.

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