The tax-exempt Roth IRA is one of the most effective retirement planning vehicles, and the sooner you reap its full benefits, the better off you’ll be in the long run. The only real downside to the Roth IRA is that it comes with contribution limits (you can only contribute a limited amount in a year) and income limits (you must earn less than a certain amount). amount to be able to contribute directly).
Here, we’ll take a look at how to maximize your Roth IRA for 2021 and 2022, even if you start after the start of the new year.
Take 2021 First
Before we begin, let’s assume that you meet the income limits to contribute directly to a Roth IRA in 2021; in other words, you earn less than $ 125,000 as a single person or $ 198,000 as a married couple. If this matches your profile, you will be able to put money directly into a Roth IRA for the 2021 tax year, up to a contribution limit of $ 6,000 if you are under 50 and 7,000. $ if you are 50 or older.
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Remember that you are contributing to a Roth IRA with after-tax income (like the money you would receive in your bank account from a paycheck). After you have contributed, you can enjoy tax-free compound growth, which will be available to you without penalty in retirement, provided the account has been open for at least five years.
The IRS allows you to retroactively contribute to your Roth IRA for a given tax year as long as you do so by April 15 of the following year. For example, even if you haven’t contributed anything to your Roth IRA so far in 2021, you still have until April 15, 2022 to do so. You will not receive a tax deduction for the contribution, but you will enjoy a tax-exempt investment space.
If you decide to maximize your Roth IRA on January 1, 2022, make sure your 2021 allowance is met; that is, make sure you have contributed up to your total 2021 limit before tackling contributions for 2022. This ensures that you are making the most of the (limited) space you have available. .
End 2022 as soon as possible
Once you’ve contributed the maximum for the 2021 tax year, you can then look to maximize your Roth 2022 contributions. The ideal scenario for someone who hasn’t contributed to their Roth IRA in 2021 is to do this. Both on January 1: Add the maximum allowed for 2021 first, then add the maximum allowed for 2022 shortly thereafter. For those under 50, this represents a total contribution of $ 12,000 ($ 14,000 for those over 50).
The main advantage of doing this as early as possible is that your money has more time to accumulate tax-free; the effect is amplified because the Roth space has a unique value and there is not a lot of space to start. So it makes sense to take advantage of everything you can, while you can still.
It is also good to know that you can withdraw Roth contributions anytime, tax and penalty free. If you are under 59.5 years of age and you receive Roth IRA money before five years have passed since you opened the account, you will need to pay taxes and penalties on the earnings portion of your withdrawal.
In summary, it’s best to open your Roth IRA as soon as possible and avoid withdrawing anything from it until you’ve reached the age of 59.5. Think of your Roth IRA as the heart of your nest egg – if you can avoid hitting it, you’ll be much better off in the long run.
Think long term
Saving for retirement is probably not the most exciting thing you’ll do on vacation, but the long-term effects of your good decisions now will have exponentially better effects in the future. Doing these really little things now – like opening and contributing to a Roth IRA – can make it seem like you’re not doing much. But as time goes on and compound interest sets in, you will set yourself up for a very prosperous future.
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