The maximum contribution limit per the 2015 IRS rules is $5,500 for each person in a couple under the age of 50. ($6,500 if you’re 50 or older.) So that means we contribute $458.33 apiece each month. That’s a deduction of $916.66 every month from our income. Although that may sound like a lot of money, I’m sure there are plenty of worse and less constructive ways we could be blowing through $917 every month.
In this post, we’re going to talk about how you and your spouse can accomplish maxing out your Roth accounts too.
Why Hitting the Max Contribution to Roth IRA Savings Is Important:
Before we talk about “how” to get there, let’s make sure we understand the reasons “why” we’d want to in the first place.
The main reason you should be so adamant about maximizing your Roth IRA savings is because it gives you the unique opportunity to dodge taxes in the future. Imagine a lifestyle where all the income you use to cover your living expenses is considered “tax free”. That’s exactly what the withdrawals from your Roth IRA accounts will be considered once you’re near retirement and start withdrawing the income. In contrast with your other types of savings accounts such as a traditional 401k or IRA, you’ll be taxed at whatever the rates are at the time you retire.
Another thing to consider to is what kind of tax bracket you’ll be in when you actually retire. In theory, we’d all like to budget to be “rich” and enjoy a comfortable lifestyle when we retire; moreso than what we’re accustomed to now. While that’s all fine and good, if you make more money in the future than you do now, that means you’ll likely be in a higher tax bracket. And that means you’ll owe more in taxes for your traditional accounts. However with your Roth IRA accounts, your withdrawals will still be tax-free.
How to Save Up to the Maximum Roth IRA Contribution Limit:
Making sure you have enough money every month to hit the max Roth IRA contribution is very similar to any other bill or payment you make: You just have to budget for it.
The first thing you’ll want to do is take a look at your overall family budget and decide where you can cut some fat. Look at things like your discretionary spending, entertainment bills, etc. Could you get a cheaper cable setup or lower cell phone plan?
One not so obvious place you can try: Your 401k! Perhaps you’re already doing a fine job saving up a decent amount in your 401k. While that’s wonderful, it may not be the smartest move strategically when it comes to retirement planning. Once you exceed the amount necessary to get your full employer 401k match, other alternatives for saving start to look more appealing for those extra contributions. This is because 401k plans are often ridden with high fees and inadequate performers.
Do this simple test: Compare your 401k account’s performance against that of the funds you wish to invest in with your 401k and ask yourself: Which one would I be better off with? If you find that the lower cost Roth IRA fund is the better bet, consider deferring those amounts exceeding the amount necessary to get the full employer 401k match over to your Roth IRA instead.
Once you’ve got some capital to work with, the next step is to make it painless! You can easily do this by setting up monthly reoccurring debits from your checking account right into the Roth accounts. Then just like your mortgage or car loan, you’re “paying” your Roth IRA account each month. What’s even better is that some brokerage services will automatically setup your debits so that you max them out each year. That’s helpful because then you don’t even have to think about it!
If you’re still struggling to come up with enough capital to max out your Roth accounts, then give it time. When you work at it, your financial situation will change throughout your career. Your income level will go up. Bills like daycare or short-term car loans will drop away. When that happens, be strategic and re-assign those amounts, no matter how small, to your investment initiative. Before long you’ll be hitting the max contribution to your Roth IRA accounts in no time!
What If I Make Too Much Money To Participate?
If your income level is too high to participate with a Roth IRA but you still really want to, then you’ll be delighted to know that there is still a way you can contribute. You can use a technique called a Backdoor Roth IRA where you first contribute to a non-deductible traditional IRA and then immediately convert the amount over to your Roth account. You can find out more about this at our post here.
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