So, how much should someone contribute to a Roth IRA, and how often should they do it? Before we answer these questions, it’s important to understand what a Roth IRA is and what makes it so popular.
What Is a Roth IRA?
Generally speaking, IRAs allow people to access financial markets in a tax-advantaged way. For instance, traditional IRA contributions are tax-deductible today, but investors will have to pay income tax when they withdraw that money during retirement. In contrast, Roth IRAs allow people to pay taxes when they deposit the money guaranteeing that they won’t have to pay taxes when it comes to withdrawing it, as long as they adhere to the withdrawal rules.
How Much Should People Contribute to a Roth IRA Monthly?
The amount someone should contribute to a Roth IRA depends on a number of factors. From their personal objectives to annual limits, it’s hard to determine the perfect monthly contribution. The following are just a couple of factors that people should take into consideration when calculating their monthly Roth IRA contribution.
Age and Earnings
How much someone can contribute to retirement most likely depends on their age and earnings. In other words, those who make more money and are older usually contribute more. That’s because their retirement is drawing near, and the more money they can save, the better. In contrast, the younger or those earning less are not under pressure to contribute the maximum amount yearly since they are far from retirement.
Other Investment Opportunities
Another thing people should think about when contributing to a Roth IRA is the other investment opportunities available to them. If people only have so much to contribute to retirement each year, they may want to put their money towards other types of savings, such as a 401(k) or a traditional IRA.
Annual Limits
Maxing out their yearly Roth IRA contribution should be a no-brainer for someone with plenty of money to invest. It’s important to mention that the annual limits change each year, depending on financial regulations. For instance, the maximum amount of money an individual can put in a Roth IRA in 2022 is $6,000. The amount jumps to $7,000 for individuals age 50 or older.
When Should People Contribute to Their Roth IRA?
However, not everybody can afford to spend up to $7,000 all at once every year. As a result, monthly contributions are common, and the suggested amount is 20% of their income. But regardless of when someone decides to contribute, it’s essential to make it consistent. That way, people can make saving up money a habit while also taking advantage of dollar-cost-averaging.
Investors also need to remember that they can contribute to an IRA as late as the tax-filing deadline of the following year. In other words, the deadline for 2021 is mid-April 2022, which is plenty of time to get the money for at least a couple of months’ worth of contributions. Find out here if Pennsylvania taxes Roth IRA.
Final Thoughts
Overall, the amount of money people contribute is always tied to their finances. While some can afford to max out their annual contributions, others can barely get enough money for a monthly payment. In any case, Roth IRAs can be an investment that can help during retirement years. There is, however, the matter of losing money in a Roth IRA. Though Roth IRAs have their own risks, it’s important to remember that there is no such thing as a 100% safe investment.
At the end of the day, it’s true that investments can seem complicated, especially for those new to them. Even so, they can be a vehicle for financial investment and potential financial independence. And, with the help of financial consultants, you can understand the details of Roth IRAs and other investment options for your life, not just for today but for decades from now.
Disclosure: Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax, legal, or investment related advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earning prior to age 59 ½ or prior to the account being opened 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against in declining markets.
This material was prepared for The Kelley Financial Group.