Individual retirement accounts are a great way to save for your retirement tax-free. What’s not so great is figuring out how you can scrape the money together to take full advantage of it.
The IRS allows you to contribute up to $6,000 in 2020, the same as in 2019. People aged 50 or older can contribute an additional $1,000 to an IRA.
While Roth IRAs have the same contribution limits, we're talking mainly here about traditional IRAs, which offer an upfront tax break. (With a Roth IRA, your tax break is delayed: Your money grows tax-free and everything comes out of the account tax-free in retirement.)
If finding the money to max out your IRA contribution isn’t your problem, check out our top picks for the best IRA providers. Once you open an account, you can fund an IRA with cash, a check or a direct transfer from your bank.
Everyone else, read on for advice on how to fill up your IRA to the brim.
» See our list of the top IRA account providers
1. Let Uncle Sam help you
Yes, some savers can actually get the government to help them feed their IRA.
Here’s how: You may be able to get a bigger refund on your taxes by claiming a deduction for your contribution to a traditional IRA. Then, use the extra refund money to build up next year’s IRA contribution.
Are you eligible for this tax deduction? If you (and your spouse if you're married) don't have a retirement plan at work, then generally you're eligible for the full deduction.
But if you or your spouse is covered by a retirement plan at work, you’ll need to earn less than certain amounts to get this little trick to work.
For single tax filers, if you have a retirement plan at work, you’ll get the full tax benefit if your modified adjusted gross income is less than $65,000 in 2020 ($64,000 in 2019). The tax benefit is reduced for incomes up to $75,000 ($74,000 in 2019). Above that higher amount, Uncle Sam says “no way” — no tax deduction for you.
For married couples filing jointly, if you have a retirement plan at work, you’ll get the full benefit if your modified adjusted gross income is less than $104,000 in 2020 ($103,000 in 2019). Above that amount, the value of the deduction starts to decrease, and it phases out completely above $124,000 ($123,000 in 2019).
For married couples filing jointly, if your spouse has a retirement plan at work, you’ll get the full tax benefit if your modified adjusted gross income is less than $196,000 in 2020 ($193,000 in 2019). The deduction phases out completely above $206,000 ($203,000 in 2019).
If you earn too much to get this credit, consider a Roth IRA instead. There are income restrictions here, too, but they're more generous. And you'll get some seriously good future benefits instead of a tax break today. Check out our guide on Roth IRAs vs traditional IRAs.
» Did you know? Even without a tax deduction, a nondeductible IRA makes sense for some people
2. Let Uncle Sam help you again
The government may come to your rescue again, especially if you’re a low- or moderate-income saver. You can claim the Saver’s Credit on your tax return, which offers up to 50% back on a contribution to a traditional IRA up to $2,000 ($4,000 if you're married). However, like the trick in the first example, you’ll need to have an income below a certain level to qualify. But if you do, you can take advantage of both tax breaks to fund your IRA.
Married couples will need a joint adjusted gross income below $39,000 in 2020 ($38,500 in 2019) to claim the full 50% benefit, while single filers cannot exceed $19,500 in 2020 ($19,250 in 2019). The credit is completely phased out for married incomes above $65,000 and for singles above $32,500 in 2020 ($64,000 and $32,000 respectively in 2019).
Get that tax credit, then roll it into your next IRA contribution.
3. Break it down
Sometimes the hardest part of getting funds for your IRA is just getting started. After all, $6,000 is a chunk of money and it can be difficult to scrape together, especially if you’re waiting until the last minute to fund your IRA. In that case, it can be useful to break down that annual goal into smaller amounts — even daily if that’s what gets you to save.
To max out your IRA in 2020, you’ll need to save about $16 per day, or about $115 per week. Set aside that amount, then transfer it to your IRA on a daily or weekly basis.
4. Pocket your tax refund
If you get a tax refund (use our free tax calculator to estimate), consider using that money to prop up your retirement savings. Funnel that extra money into next year’s IRA contribution. “Found money” is a great opportunity to get ahead on your savings plan.
5. Pay your IRA first
Steal a play from your employer’s retirement-plan playbook: Tuck away your IRA money before you can spend it. Set up your accounts so that they funnel money to your IRA with every paycheck, just like a 401(k) plan does. If you receive a paycheck every two weeks, allow the brokerage to dip into your bank account and transfer your contribution on payday.
With 26 paychecks a year, you’ll need to siphon out about $230 each time to max out the contribution limit in 2020. Even if you can’t give up that much at a time, move some money on payday when you’re flush with cash. The rush of new money eases the pain of having to save.