A Roth IRA can set you up for a solid retirement in the future. These accounts are tax-advantaged and could deliver better gains than a traditional brokerage account. Contributing more money each month to your Roth IRA will help you reach retirement goals sooner, but putting too much money into your account may leave you vulnerable if an emergency expense arises. While the monthly Roth IRA allotment is on a case-by-case basis, these insights will help you determine how much you should put into a Roth IRA each month.
How does a Roth IRA work?
A Roth IRA is a retirement account that uses post-tax income to build your savings. You do not owe taxes on the funds in your Roth IRA, including capital gains. If your investment doubles while sitting in your Roth IRA, you get all of the gains free and clear. Roth IRAs have an annual contribution limit that depends on your age. The IRS set $6,500 as the annual contribution limit for Roth IRAs in 2023. This limit tends to change each year. People who are 50 or older can make a $1,000 catch-up contribution on top of the established limit.
Factors to consider when deciding how much to contribute
While you cannot contribute more than $6,500 or $7,500 per year, depending on your age, the maximum contribution does not make sense for everyone. You should keep these details in mind when deciding how much to contribute to your Roth IRA.
1. Determine your financial goals and retirement plans
Starting with the end in mind and reverse engineering can help you determine the action steps you should take right now. Do you plan to downsize or stay where you are and add a few vacations to your schedule? These questions influence how much money you need to save.
2. Consider your age and remaining working years
As people get older, they have less time to contribute to their retirement accounts. Accelerating your contributions as you get closer to retirement can give you extra financial padding when retirement arrives.
3. Assess your current financial situation
Making the maximum Roth IRA contribution is the ideal choice for growing your retirement account. But it’s not suitable for everyone, especially if you need the money to cover everyday expenses. People should consider how effectively they cover their everyday expenses and what their emergency funds look like before deciding on their monthly contribution.
4. Consider your income and tax bracket
Roth IRAs have an income cutoff. If a single tax filer earns over $153,000 per year, they cannot make Roth IRA contributions. The same rule applies to married couples who earn $228,000 per year combined. Your contribution also cannot exceed your modified annual gross income (MAGI). If you made $4,000 as a part-time worker this year without additional income sources, you could only contribute $4,000 to your Roth IRA this year. Consumers should also look at their tax brackets to gauge if it makes more sense to use pretax or post-tax dollars to build up their retirement accounts.
5. Examine the contribution limits and deadlines
The IRS adjusts contribution limits each year and tends to raise them. Higher contribution limits give you more flexibility, and you can anticipate them in your planning. You should also observe deadlines and contribute throughout the year so you don’t have to scramble to raise funds at the last second.
Strategies to increase and stay consistent in your Roth IRA monthly contributions
The retirement journey is not a sprint. These strategies can help you on your path to retirement and growing your Roth IRA.
1. Maximize your income
The more money you make, the more money you can invest. Picking up side hustles and looking for opportunities to advance your career can increase your total earnings. Side hustles let you capitalize on extra time, while career advancements let you earn more money while working the same number of hours.
2. Automate your contributions
Some people want to contribute to their Roth IRAs each month but forget to do so. Automated contributions enable your Roth IRA to grow seamlessly in the background. You won’t have to remember to log into your investment account each month because funds will automatically get pulled from your bank account.
3. Consider catch-up contributions if you are over 50
When you turn 50, you can contribute an additional $1,000 to your Roth IRA each year. Making these catch-up contributions can put you in a better position during your retirement years.
4. Review and adjust your contributions regularly
Retirement plans are never set in stone. Periodically looking at your finances and the performance of your assets can help you decide on future contributions. For some people, it makes sense to slow down on contributions for a year if money is tight. It may make sense to ramp up your investments if asset prices have declined and you believe this has created an opportunity. Consumers should continue staying on top of their finances and investments when making key decisions about their Roth IRAs.
Benefits of contributing to a Roth IRA
Contributing to a Roth IRA presents several benefits for consumers.
- Tax advantages of Roth IRA: You do not get taxed on withdrawals or capital gains. If your investment doubles, you get to keep all of it.
- No age restrictions for contributions: You can get started as soon as you are ready. You just need to earn income to get started.
- No required minimum distributions: You do not have to withdraw funds from your Roth IRA. It’s only required that funds get withdrawn when the account holder dies.
- Withdrawal flexibility: You can withdraw the money you put into a Roth IRA at any time without incurring a penalty fee. The early penalty fee only applies to earnings. For instance, if you contribute $6,000, and it turns into $8,000, you can take out $6,000 without paying any penalties. Withdrawing any of the $2,000 gain — any withdrawal in excess of $6,000 — would result in a penalty fee.
- Ability to pass on the account to beneficiaries: You can pass a Roth IRA account to a beneficiary. The beneficiary can keep the Roth IRA but must withdraw all funds from the Roth IRA within five years. That gives the new account holder up to five years of tax-free dividends and capital gains.
Laying the groundwork for your retirement
A Roth IRA can be a useful resource as you plan your retirement. Investing in this account lets you capitalize on tax-free compounding because you put post-tax money into the account. Creating retirement plans now lets you get ahead and increase the likelihood of a smoother retirement.
FAQ
Can you start contributing to a Roth IRA at any time during the year?
You can contribute to a Roth IRA at any time of year. The contribution deadline for one year is your tax return filing date of the following year.
Will you be taxed on your contributions to a Roth IRA?
You will not be taxed on your contributions to a Roth IRA. You paid taxes on the proceeds before putting them into your account. A Roth IRA uses post-tax dollars.
Can you transfer funds from a traditional IRA to a Roth IRA?
You can transfer funds from a traditional IRA to a Roth IRA, but you will have to pay taxes on the funds in your traditional IRA during the transfer.
