wealth distribution

You Can Still Max Out Your IRAs for 2021, But Only Until April 15. Here’s How to Do It

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Tax season is officially in full swing, with the IRS now accepting tax returns. But before you file, did you know you can still contribute to your traditional or Roth IRA until April 15, 2022? 

That’s the last day to contribute to your IRA against the 2021 maximum of $6,000 (or $7,000 for investors age 50 or older). Depending on what type of IRA you have – traditional or Roth – you can realize tax savings or increase your tax return, or get a boost toward tax-free retirement savings. And you’ll still have the rest of 2022 and until April 15, 2023 to max out this tax year’s contributions.

Whether the traditional or Roth IRA is better “depends on where your tax brackets fall, and if the IRA contributions will be deductible or not,” says Gina McKague, founder of McKague Financial.

If you’re single and have an adjusted gross income (AGI) of $76,000 or more and have access to a retirement plan at work, you won’t get any deduction on your current-year taxes. If you don’t have access to a retirement plan at work, you can deduct your traditional IRA contributions and reduce your taxes. 

Depending on those factors, a Roth IRA may be a better idea if you’re under the Roth IRA income limits.

Let’s talk about how to take advantage of the extra contribution time to set yourself up for success. 

Benefits of a Roth IRA

With any IRA, you put money in, invest the money, then make withdrawals when you retire. The advantage of a Roth IRA is that your money grows tax-free, and there are no taxes on your withdrawals because you contribute with after-tax money — money you’ve already paid tax on. 

“A Roth IRA will never be taxed,” explains McKague. “In the future, you’ll never have to settle up with the IRS or take required minimum distributions, so you can keep your money for as long as you want.” 

When you reach age 59 ½, you can take distributions without paying taxes on contributions and earnings. Before you reach that age, you can withdraw your contributions (but not earnings) without penalty, although there are certain situations where you can withdraw your money (including earnings) without paying taxes or a penalty after your account’s been open for five years, such as when you: 

  • Buy, build, or rebuild your first home 
  • Pay for unreimbursed medical expenses that are more than 7.5% of your adjusted gross income 
  • Pay for medical insurance premiums while unemployed 
  • Pay for qualified education expenses

Another huge advantage of the Roth IRA is that you don’t have to claim your withdrawals with the IRS because it’s not counted as income. With a traditional IRA, not only do you pay taxes, but distributions can also change your tax bracket and affect your other income, such as social security, McKague points out. In her experience, she’s seen clients avoid pulling out their funds because they don’t want to affect their other assets, which defeats the purpose of saving for retirement. A Roth IRA, she says, can offer mental security and peace of mind. 

Benefits of a Traditional IRA

The biggest benefit of a traditional IRA is that you can lower your income taxes for the current year by contributing. You essentially get to save on your taxes now, but pay tax at whatever income bracket you’re in when you make a withdrawal. 

For most people, their tax bracket is lower in retirement than during their prime earning years, so it’s usually a good trade-off  — but not always. A traditional IRA might be better if it drops you into a lower tax bracket in the year that you file or if you want a bigger tax refund, but consider that traditional IRAs require you to take required minimum distributions starting at age 72. 

Because you’ll pay taxes when you withdraw from a traditional IRA, the amount you see in your account isn’t the amount you’ll end up with. This isn’t true for a Roth IRA, which allows you to withdraw your money tax-free any time you’re 59 ½ or older. All the earnings are yours to keep. 

Roth IRA Contribution Limits 2022

Single Filers (MAGI) Married Filing Jointly (MAGI) Married Filing Separately (MAGI) Maximum Contribution for individuals (under age 50) Maximum Contribution for individuals (age 50 and older)
less than $129,000  less than $204,000  $0 $6,000 $7,000
$130,500  $205,000  $1,000 $5,400 $6,300
$132,000  $206,000  $2,000 $4,800 $5,600
$133,500  $207,000  $3,000 $4,200 $4,900
$135,000  $208,000  $4,000 $3,600 $4,200
$136,500 $209,000  $5,000 $3,000 $3,500
$138,000  $210,000  $6,000 $2,400 $2,800
$139,500  $211,000  $7,000 $1,800 $2,100
$141,000  $212,000  $8,000 $1,200 $1,400
$142,500  $213,000  $9,000 $600 $700
$144,000 & over  $214,000 & over  $10,000 & over $0 $0
Charles Schwab

Max out Your IRA in 2022

The key to maxing out your IRA is to make it purposeful and contribute regularly. Whether your reason is saving for a comfortable retirement, building generational wealth, giving your money time in the market, or practicing financial discipline, you’ll want to be clear on the reason that motivates you to save. 

Pro Tip

You have until April 15, 2022, to add funds to your traditional or Roth IRA and have it count toward your 2021 contribution limit. This gives you an extra chance to save even more for your retirement in 2022.

In 2022, the contribution limit for both traditional and Roth IRAs is $6,000. If that sounds like a big number, you can contribute $500 per month to hit the maximum – or whatever amount fits your budget. Remember, you’ll have until April 15, 2023, to max out your 2022 contributions. 

Here are a few guiding principles to keep in mind. 

Dollar Cost Averaging

Dollar cost averaging simply means contributing at regular intervals despite how the market is performing. Some people like to make a lump-sum contribution or save money to time the market and buy low. According to FINRA, dollar cost averaging results in better results 66% of the time.

In addition to controlling your exposure to risk, it’s also a way to get your emotions in check. Everyone wants to time the market, but contributing regularly via dollar cost averaging is a healthy way to keep contributing to your IRA. 

Automatic Contributions

Speaking of dollar cost averaging, the best way to do it is to make your contributions automatic. Whether that’s through automated transfer, paycheck deduction, or saving a portion of every paycheck, if you can create an automatic habit out of saving, it becomes second nature. If you can contribute right out of your paycheck, you’ll likely never miss it — but you’ll put your money to work right away, whether it’s $500 per month, $100 per paycheck, or whatever amount works for your finances. 

Just remember to both save and invest your money. Contributing doesn’t always mean your money is invested. If you need to take that extra step to purchase investments, be sure to add that to your routine. 

Side Hustles and Extra Income

Earning extra cash with side hustles is an excellent way to add to your retirement funds and give yourself more time for your money to grow. 

If you go this direction, it’s best practice to have an amount in mind, whether that’s weekly, monthly, or whatever timeline you decide on. And while it’s great to save cash for your future self, it’s good to set boundaries so you don’t burn out your current self in the process. 

Prioritizing your time, having a clear “why,” and choosing the right side hustles are all important. And because time in the market is better than timing the market, the sooner you can start saving, the longer your investments will have to grow. 

If you’re currently employed, you might also consider asking for a raise or job hopping to increase your income. Just remember to keep lifestyle creep in check – that means…

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