Remember the first time your speedometer crept past 70, 80 or even 90 miles per hour? An exhilarating, if fleeting, experience. Maxing out your Roth IRA, on the other hand? Less exhilarating, but much more rewarding.
Whether the balance in your retirement accounts sits at empty or you’re trying to rev up your planning, it may be time to take a Roth IRA for a spin. This type of individual retirement account will grant you access to a broader array of investments that often have lower fees than employer-sponsored plans. And even with 2017 in the rearview mirror, you have until April 17 to contribute to these IRAs for that tax year.
Whether you’re looking to max out last year’s or this year’s contributions, the following tips will keep you on track.
1. Open an account
You’ll need an eligible account to max out your Roth IRA contributions, and stuffing money in a shoebox won’t cut it. Why IRA the Roth way? These accounts offer valuable tax advantages: Money and investment earnings grow tax-free and there’s no income tax on withdrawals during retirement. Plus, you’ll benefit from compounding interest, earning interest on both investments and interest over time.
Generally speaking, if you’re currently in a low tax bracket, consider a Roth IRA because your tax rate may be higher at retirement.
The primary advantage of Roth versus traditional IRAs comes down to taxes. With a Roth, you pay taxes upfront, whereas you’ll pay taxes later with a traditional IRA when you take distributions. Generally speaking, if you’re currently in a low tax bracket, consider a Roth IRA because your tax rate may be higher at retirement.
Setting up a Roth IRA takes only minutes. You’ll need to decide whether you prefer an account with an online broker or a robo-advisor, depending on how actively you want to manage your investments. Once you’ve opened an account, select investments. To benefit from both diversification and low costs, consider a portfolio constructed of index funds and exchange-traded funds.
Look for providers with low account minimums; low or no account fees and fund minimums; a large selection of no-transaction-fee mutual funds and commission-free ETFs; and the type of customer service and educational resources you desire. Finding a Roth IRA comparison on the web can help you review providers side by side.
2. Envision your future
It can be difficult to prioritize far-off goals, especially with opportunities for instant gratification today. Experts recommend saving up to 15% of your pretax income each year for retirement.
If you don’t want to work forever, you’ll probably need to save more than what’s allowable in an employer-sponsored plan.
If you don’t want to work forever, you’ll probably need to save more than what’s allowable in an employer-sponsored plan (a maximum of $18,500 for workers under age 50 for tax year 2018). Use a retirement calculator to check whether you’re on track.
3. Set manageable contribution goals
Retirement planning is a decades-long journey, and shorter-term goals, like setting aside $5,500 in one year, can be daunting for many people. This isn’t the type of loose change you likely have laying around — and it’s money you should try to leave untouched, and growing, for decades.
Breaking down that $5,500 goal into a more manageable weekly or monthly amount may help. Maxing out contributions this year works out to about $15.07 a day, roughly $105.77 each week or about $458.33 monthly.
With those numbers in mind, set up a schedule for making contributions to your Roth IRA. Don’t go for the extremes, such as once a day or once a year. Instead, opt for a manageable schedule, like the same day each month. This will help ensure you don’t rack up trading costs with a schedule that’s too frequent. You also can resist the urge to time the market by avoiding a schedule that’s too infrequent.
This isn’t the type of loose change you likely have laying around — and it’s money you should try to leave untouched, and growing, for decades.
Opt for an automatic trading plan, if possible, to benefit from dollar-cost averaging. This is a strategy of spreading out investment purchases over time to ensure you don’t invest all your money when prices are high.
4. Know your limits
Don’t despair if you can’t max out a Roth IRA this year. This goal may take time to achieve. Even a few hundred dollars invested can balloon to several thousand dollars over a decade or two.
When in doubt, be prudent: Don’t try to max out an IRA if you’re racking up high-interest debt in the meantime or don’t have enough to cover monthly expenses. Contribute whatever you can this year and resolve to increase that amount down the road.
A previous version of this article mistakenly implied that penalties may apply to withdrawal of contributions to a Roth. The story has been corrected.