An individual retirement account (IRA) is a very popular way to save for retirement — especially if you don’t have access to a workplace retirement account like a 401(k). While there are several important decisions to make when saving with an IRA, such as how to invest your money, the single most important step when it comes to saving with an IRA is funding it. If you don’t put enough money into your account while you’re working, even a multitude of smart investments won’t leave you with enough money to retire on. While there is a hard limit of $6,500 in contributions to an IRA each year as of 2023 ($7,500 if you’re over age 50), up to that point there are ways you can maximize your IRA contributions. Here are three tips from financial services firm Vanguard on how to put the most money into your account as possible.
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Tip One: Contribute Early
In the long run, this might be the most important step to ending up with enough money to fully fund your retirement. When you contribute early, you’re able to take advantage of compound interest.
We can show how important this is using SmartAsset’s investment return calculator. For simplicity’s sake, let’s say you invest $1,000 and have a 4.00% rate of return. If you put that $1,000 in at age 20 and take it out 30 years later at age 50, you have $3,243, growth of $2,243. Now let’s say you only put it in at age 30 and still take it out at age 50. Your investment is only worth $2,191, more than $1,000 less.
Apply this to the larger scale of retirement savings and you are looking at a serious missed opportunity if you wait to save. Retirement may seem very far away when you are in your 20s, but it is crucial to save as much as possible early so that you can take advantage of this compounding growth.
Tip Two: Use Automatic Contributions
Putting aside a big chunk of money at any one point in the year can be intimidating — it seems like you’re losing a lot of money. And as important as retirement savings is, it’s understandable that in a world where prices are going up, putting a lot of money aside for the future may be too painful.
To get around this psychological barrier, consider using automatic contributions. Vanguard notes that to hit the $6,500 limit, you could put aside $542 each month. If you can’t afford that just yet, you can also set up automatic increases. You could set up your account to take out $200 a month for the first year and bump that up to $300 after 12 months.
Tip Three: Make Investment Decisions
Don’t let your money simply sit as cash in your IRA. Saving is great, but you are unlikely to meet your goals if you don’t take the time to make smart investment decisions at the same time.
Target-date funds are one good option for retirement savers, but any indexed-fund will work. Indexed-funds follow the market, so as long as the market grows over time — even if there are periodic dips — you’ll be in good shape.
The Bottom Line
Using an IRA is a great way to save for retirement. You can put up to $6,500 into your IRA each year — $7,500 if you’re 50 or older — but there are ways to make sure you’re getting the most out of your retirement savings, such as investing early to take advantage of compound interest and making smart investment decisions in a prompt manner.
Retirement Planning Tips
- A financial advisor can help you make sure you’re on the right track with your savings plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors. And you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you do happen to have access to a 401(k), make sure you’re taking advantage of any employer match available to you. This is literally free money, and you don’t want to leave it on the table.
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