7 reasons to maximize your Roth IRA


If you’ve opened a Roth IRA, you’ve already laid the groundwork for one of the most important parts of your life: saving money for your years of service.

However, opening a Roth IRA is only the first step in a smart retirement savings strategy. To maximize its benefits, you need to focus on maximizing your contributions. Reaching this threshold seems different, depending on your age: if you are under 50 in 2021, you can contribute up to $ 6,000. If you are 50 or over, you can put in an additional $ 1,000 for a total of $ 7,000.

Should I Maximize My Roth IRA?

Depositing $ 6,000 or $ 7,000 in a Roth IRA will not give you the immediate rush for tax relief. Since your contributions are not tax deductible, regardless of your income or whether you have a working pension plan, you might be tempted to use that money for other purposes.

However, if you can afford to maximize your Roth IRA, waiting for the deferred gratification of tax-free withdrawals in retirement can turn out to be one of your smartest financial decisions. Consider these seven reasons.

7 reasons to maximize your Roth IRA

1. Without obligation to withdraw funds, it can be used as longevity insurance

One of the unique advantages of a Roth IRA is that it does not have: the obligation to start withdrawing money at a certain age. With other tax-deferred options like a traditional IRA or 401 (k), account holders must start withdrawing money before age 72.

Think about your family history. Is one of your grandparents still alive at 90? While the average American today has a life expectancy of around 77 years, keep in mind that advances in medicine may increase this typical time frame. A Roth IRA gives you a reserve of money in which you can wait until you think the time is right. Regardless of your current age, the much older version of yourself will be grateful for these maximum contributions.

2. Contributions can also benefit your heirs

You may never need to use your Roth IRA money, which means your heirs will be the ones to thank you for your decision to maximize your contributions.

Your heirs will have to withdraw the money over a period of 10 years after your death, but their withdrawals will be tax-free since it is a Roth IRA.

3. Since the rules may change in the future, it is crucial to make the most of the current potential.

There is no guarantee that you will be able to contribute to a Roth IRA in the years to come. Congress might consider lowering annual income limits and making other changes, limiting who can convert a tax-deferred retirement account to a Roth IRA or restricting the ability to use a Roth IRA backdoor. , for example. So while the advantage is there, don’t let it slip away.

4. Tax rates can always change too

You can’t predict what tomorrow will look like, but there are steps you can take to protect yourself against higher taxes. By maximizing your contributions each year and paying taxes at your current tax rate, you eliminate the possibility of paying an even higher rate when you start making withdrawals. Just as you diversify your investments, this measure diversifies your future tax exposure.

5. You will have a realistic picture of your retirement budget

What you have accumulated after taxes are what really matters. After all, this is what will pay your bills. This is one of the main advantages of the Roth IRA.

Because the entire amount is yours, you have a real understanding of your future finances. The same cannot be said of your tax-deferred 401 (k) or your traditional IRA, which will involve sharing some of the proceeds with Uncle Sam.

6. This year’s contributions are an opportunity for long-term growth

Between worries about inflation and worries about the stock market’s ability to continue its recent teardown, you might be concerned about buying too high. However, maximizing your contributions is not a one-size-fits-all strategy.

Ideally, you will be contributing to your Roth IRA this year, next year, and for many years to come. And when you start withdrawing funds, you will likely be withdrawing them over a long period of time. So don’t worry about what the market is doing today or tomorrow – spend some time thinking about how your investments will look much later.

7. This money can serve as a backup of last resort for your emergency fund.

Since you have already paid taxes on the money you contribute to your Roth IRA, there are no taxes or penalties for withdrawing the money you contributed, at any time, for any reason. whether it be.

If you find yourself facing a serious emergency that completely depletes your primary emergency fund (remember that this first emergency fund is absolutely essential to your financial well-being), the money paid into your Roth IRA (but not investment income) is another buffer against major money problems.

However, I cannot stress enough the “last” as a last resort. Withdrawing from a Roth IRA is a one-way street. You are not entitled to higher annual contribution limits in future years to compensate later. Instead, any early withdrawal represents a permanent setback to your retirement planning.

When to pay your contributions

The calendar may be drawing to a close for 2021, but you have more time to maximize your contributions. You can make 2021 contributions until tax day in mid-April. If the start of 2022 is coming and you haven’t hit your max yet, focus on the rearview mirror – 2021 – before you turn to your 2022 limits.

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