Investing using an individual retirement account (IRA) can help you be a wealthier retiree. IRAs are great because you can open an account with any brokerage firm and usually have a choice of way more investments than if you put your money into a 401(k). You can also claim a tax deduction in the year you make your contribution if you choose a traditional IRA, or can make tax-free withdrawals if you choose a Roth IRA (although you won’t get that upfront deduction with that option).
In 2024, the amount you are allowed to contribute to these tax-advantaged accounts has gone up. While you could contribute a maximum of $6,500 in 2023, you’re allowed to put up to $7,000 into your IRA account in 2024. If you are age 50 or over, you are also eligible to make an additional $1,000 catch-up contribution.
If you want to make the most of these accounts, here are a few simple steps to take that will enable you to max out your IRA.
1. Make sure you’ve earned any 401(k) match first
Although IRAs offer benefits over a 401(k), including more flexibility in investment options, you still want to make sure you are putting enough into a 401(k) to earn your full employer match before switching your retirement account contributions to your IRA.
An employer match is free money, although you have to contribute to your account to get it. If your employer matches 100% of contributions on up to 4% of your salary and you make $45,000 a year, you could get as much as $1,800 in free money as long as you invested that amount in your workplace plan. Don’t pass that up — put your money into your 401(k) first to get that match.
2. Choose the right kind of IRA
If you’ve got your 401(k) matching contributions earned and want to invest in an IRA but don’t yet have one open, you’ll have to decide which account type is right for you. The $7,000 contribution limit applies to both Roth and traditional IRAs. You can invest that much total across both accounts, although you can split the amount any way you want.
Roth IRAs provide a tax break later, allowing for tax-free withdrawals as a retiree, so can be a better option if you think your tax rate will be higher in the future. Traditional IRAs provide a tax break in the year you contribute but you do pay taxes as a retiree on withdrawals. So these are a good choice if you think you will be in a lower tax bracket as a retiree.
You can open both types of accounts with most brokerage firms, so which one you choose is just a matter of personal preference.
3. Decide how much to contribute each month
Next, you’ll need to decide how much to contribute each month. It’s easiest if you just break the big goal of a $7,000 (or $8,000) contribution down into monthly goals. So, you could invest either $583.33 per month or $666.67 per month if you’re eligible for catch-up contributions.
This may not work for everyone. For example, you may want to jumpstart your IRA investments by depositing your tax refund into them and then investing a smaller amount each month. The important thing is to set a specific goal for when the money will go in.
4. Automate your contribution
Once you’ve decided how much to contribute and when, the next step is to automate the process. Arrange to have the funds taken directly from your checking account. So, if you plan to contribute $583 per month, you could have that entire amount auto-transferred from your bank to your brokerage firm on payday, or split it and have $291.50 transferred over each payday.
By automating your contributions, you’ll make sure you never miss one and will hit your goal of maxing out your IRA.
5. Don’t forget to pick your investments
Finally, once your money is in your IRA, you’ll usually have to buy investments with it (except in limited cases, like if you are using a robo-advisor). So don’t forget to sign into your account and choose what to do with your money. For many people, the simplest option is to just set up automatic purchases of an S&P 500 ETF. The S&P 500 tracks the performance of the market and consistently earns around 10% average annual returns over time.
By taking these five steps, you can max out your IRA contributions and be well on your way to a more secure retirement.
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