An individual retirement account, or IRA, is a powerful savings tool for retirement. But there are a few tricks you might not know to make the most of your retirement savings account. Here are four unexpected ways to level up your IRA.
1. Get paid to contribute
If you're struggling to contribute to your IRA, the federal government wants to help you out. You can receive a tax credit just for contributing up to $2,000 to your retirement account if your income is below a threshold. It's officially called the Retirement Savings Contribution Credit, but everyone just calls it the "Saver's Credit."
That tax credit stacks with the tax deduction you can take for contributing to a traditional IRA. If you're on the threshold of qualifying for the next tier, you can use the IRA deduction in order to push your AGI below the threshold. That can maximize your tax savings on your contribution, and may be a good reason to choose a traditional over a Roth IRA.
If your income is low enough to qualify for the Saver's Credit without any additional adjustments, you may be better off contributing to a Roth IRA.
2. Access your IRA early, before 59½
IRAs are meant for retirement, but what if you retire before 59½, the minimum age you can withdraw funds from your IRA without penalty? If you plan things carefully, you can avoid penalties entirely.
You can take advantage of Roth IRA conversions from your traditional IRA to access your funds as early as you want. The only catch is that you still have to wait five years following your conversion to make the withdrawal.
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For example, you can convert $25,000 from your traditional IRA to a Roth IRA this year, 2021. You'll pay regular income tax on your withdrawal, but those taxes can be minimal with proper planning. You can withdraw that $25,000 anytime in 2026 without penalty (even if it's been slightly less than five years). If you make these conversions every year -- called a Roth IRA conversion ladder -- you'll have a steady stream of withdrawable funds starting in five years.
3. The Roth IRA emergency fund
If you're struggling to max out your Roth IRA because you're also saving for an emergency fund, you can keep your emergency fund in your Roth IRA. The advantage of the Roth IRA is that you can withdraw your contributions at any time without penalty. But if you don't max out your contribution limit before the deadline each year, you lose that capacity. There's nothing stopping you from keeping a cash emergency fund in your Roth IRA.
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Keeping your emergency fund in a Roth IRA has the advantage of making it just slightly more difficult to access your cash. Additionally, if you withdraw a contribution, you won't be able to put it back into your Roth account. Those factors will make you take the extra consideration necessary before determining whether you really have a need for your emergency funds. By all means, use your emergency fund when you need to, but an emergency fund is not an "Oops, I spent too much this month" fund.
4. Max out your Roth IRA with the mega backdoor
If you're a high earner or just a super saver and your employer's 401(k) allows additional contributions above the $19,500 tax-deductible limit, you may be able to perform the mega backdoor Roth IRA.
The total contribution limit for 401(k) accounts in 2021 is $58,000, or $63,500 if you're 50 or older. That includes your tax-advantaged contribution, the employer match, and any non-deductible contributions you make on top of that.
If your employer plan allows in-service withdrawals, you can roll over those after-tax contributions into your Roth IRA the same year you make them. That means you can potentially add tens of thousands of dollars to your Roth IRA every year.
Take advantage of everything an IRA has to offer
An IRA is one of the most versatile retirement savings accounts. The benefits of tax-advantaged savings and tax-free growth have been covered by many. I hope you can use one or two of these tips to take your retirement planning and savings to the next level.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
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A traditional IRA is a tax-advantaged plan that allows you significant tax breaks while you save for retirement. Anyone who earns money by working can contribute to the plan with pre-tax dollars, meaning any contributions are not taxable income.
A traditional IRA is a tax-advantaged plan that allows you significant tax breaks while you save for retirement. Anyone who earns money by working can contribute to the plan with pre-tax dollars, meaning any contributions are not taxable income.
One example is the $1,000/month rule. Created by Wes Moss, a Certified Financial Planner, this strategy helps individuals visualize how much savings they should have in retirement. According to Moss, you should plan to have $240,000 saved for every $1,000 of disposable income in retirement.
The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. That means if you retire with $1 million saved, you'd take out $40,000. According to the rule, this amount is safe enough that you won't risk running out of money during a 30-year retirement.
IMPORTANT NOTE: You cannot borrow against your IRA account as you can with a 401(k) plan. You also cannot use the account to secure a loan. IMPORTANT NOTE: Unlike qualified retirement plans, the money you have in an IRA may not necessarily be protected from your creditors.
On average, in your retirement you want your IRA to hold between 40% and 70% low-risk assets like bonds. Create a specific plan that meets your needs for inflation and wealth management, while anticipating your needs for risk management.
Yes, it is possible to retire comfortably on $500k. This amount allows for an annual withdrawal of $20,000 from the age of 60 to 85, covering 25 years. If $20,000 a year, or $1,667 a month, meets your lifestyle needs, then $500k is enough for your retirement.
That means that even if you're not one of those lucky few who have $1 million or more socked away, you can still retire well, so long as you keep your monthly budget under $3,000 a month.
According to the 4% rule, if you retire with $500,000 in assets, you should be able to withdraw $20,000 per year for 30 years or more. Moreover, investing this money in an annuity could provide a guaranteed annual income of $24,688 for those retiring at 55.
Embrace the 30X thumb rule: Save 30X your annual expenses for retirement. For example, with annual expenses of ₹25,00,000 and a retirement in 20 years, aiming for a ₹7.5 Cr portfolio is recommended.
Many retirees fall far short of that amount, but their savings may be supplemented with other forms of income. According to data from the BLS, average 2022 incomes after taxes were as follows for older households: 65-74 years: $63,187 per year or $5,266 per month. 75 and older: $47,928 per year or $3,994 per month.
The safest place to put your retirement funds is in low-risk investments and savings options with guaranteed growth. Low-risk investments and savings options include fixed annuities, savings accounts, CDs, treasury securities, and money market accounts. Of these, fixed annuities usually provide the best interest rates.
The average retirement age in U.S. is 64 years old, with the average retirement age across all states spanning from 61 to 67 years old. The Social Security Act sets the minimum age to retire at 65 to receive full retirement benefits, although the minimum retirement age will continue to rise.
To have a negative savings rate means spending more money than you make and acquiring debt. The key to saving money is to: focus, make saving a habit and a priority, and discipline. Your income is not a key to saving money.
Roth IRA. If your annual income isn't too high, a Roth IRA is one of the best retirement accounts available. While your Roth IRA contributions aren't tax-deductible today, you don't have to pay income taxes on the withdrawals you make once you retire.
For traditional IRAs, the distributions you take will be taxed at your income tax rate at the time the withdrawal is made. If the distributions are taken prior to age 59 ½, a 10% federal tax penalty applies.
Individuals can save for retirement through 401(k) plans and individual retirement accounts (IRAs). A 401(k) is an employer-sponsored retirement plan. An IRA is an individual retirement account that individuals open through a bank or a brokerage firm.
Savings accounts can be a safe place to keep cash for emergencies and short-term goals. Roth IRAs are for long-term goals, primarily retirement. However, Roth IRAs can also be used for withdrawals in an emergency because your Roth contributions are always accessible without penalty. However, your earnings are not.
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