What is a Roth IRA? Similar to a traditional IRA, a Roth IRA is a tax-advantaged account that allows investors to save for retirement and withdraw funds without penalty once they reach a certain age.

In this article, we’ll show you how to:

1. Determine if you are eligible
2. Find a home for your account
3. Provide the necessary information
4. Create an investment portfolio
5. Schedule regular contributions to your IRA

After learning how to start your own Roth IRA account, stay tuned for tips on how to maximize your new retirement account. 

1. Determine if you are eligible

According to the IRS, those who file taxes as a single individual and earn an annual modified adjusted gross income (MAGI) below $161,000 are eligible to enroll in a Roth IRA. If you file taxes with a spouse, your joint income must be below $240,000 to qualify. As the investor, you are responsible for making sure you are eligible to contribute to a Roth IRA based on these limits. An online broker for a Roth IRA will not limit your ability to make a Roth IRA contribution, even if you are ineligible for making a contribution based on your income. However, if you do contribute to a Roth IRA and you are not eligible, you should correct this mistake as soon as possible. You will face a 6% penalty each year until you remedy your mistake.

Your annual gross income will also determine if you are eligible to make the full IRA contribution limit of $7,000 or if you are subject to reduced contribution amounts.

Aside from the IRS eligibility criteria, consider tackling your debt and creating an emergency savings fund before investing in a Roth IRA. Using this strategy, you can focus on cultivating an early retirement game plan without the stress of lingering debt or unexpected expenses on your mind.

2. Find a home for your account

Remember, a Roth IRA is an account type, not an investment that lives within a retirement account. If you have little interest in maintaining your retirement account, consider housing your Roth IRA with an online broker.

The best Roth IRA accounts are ones that come fully equipped with tons of investment options. Here are some questions to consider while scouting for the best home for your Roth IRA account:

• Are you interested in passive or active retirement investment strategies? If passive, consider an investing platform. If active, opt for a DIY retirement savings account. A financial advisor can help you find the perfect match.
• Are there any opening or maintenance fees you should be aware of? Although it is generally free to open a Roth IRA account, some providers may have account minimums or transfer fees.
• Is there an abundance of investment options to choose from? Long-term investment accounts like a Roth IRA generally benefit from asset diversity. Ask your provider what kind of assets and investments are available.
• Is the investment platform well-suited for buying, selling, and trading investments? Active investors should know of any fees, restrictions, or settlement periods associated with investment transactions. Passive investors should also be prepared to handle any cost when it is time to liquify their assets.

Once you answer these questions, you will be able to learn how to open a Roth IRA on the platform of your choosing.

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3. Provide the necessary information

Setting up your Roth IRA account is a breeze when you have these necessary documents at your fingertips:

• A social security number (SSN)
• A valid driver’s license or state ID
• A bank routing number
• Your bank account number
• Employer’s name and address
• Beneficiary’s name, SSN, and address

4. Create an investment portfolio

Aim to diversify the investments within your Roth IRA account. A diverse array of assets within an investment portfolio is a common way to hedge against inflation and market volatility.

Here are a few of the most popular assets that investors can incorporate into their Roth IRA account:

• Stocks: earn dividends or payouts from shares of a business 
• Bonds: earn interest from the money you lend to an entity
• ETFs: benefit from value appreciation of a group of securities
• Mutual funds: pool your money together with other investors to buy a basket of securities

Your time horizon, income level, and financial goals will ultimately determine which assets are the best match for your Roth IRA.

5. Schedule regular contributions to your IRA

Unlike a traditional IRA, Roth IRA contributions are taxed before they go to your account. So, the sooner you add your contributions, the sooner your money can start to grow in a tax-free way.

Scheduling regular contributions to your Roth IRA account can ensure that you set money aside each month for your retirement goals. Before contributing, check with your hosting platform about their contribution limits and transfer costs. 

Although you have until the next tax filing date to add contributions, you can schedule regular contributions throughout the year. However, you are also allowed to make one larger contribution annually. Some investors may choose to wait until the end of the year so they understand their income if they are close to the income limits, or to make sure they have enough earned income to make a full contribution. Select the option that best fits your individual needs. 

Tips for maximizing your Roth IRA accounts

A Roth IRA is a long-term investment account that you can maximize in the following ways:

• Invest as early as possible
• Speak with a financial advisor
• Diversify the assets in your account
• Allow your contributions to compound
• Learn Roth IRA withdrawal rules
• Name a beneficiary

Since Roth IRA contributions are already taxed, you will be able to withdraw from your account tax-free after you reach age 59 ½. Contributing now will allow your investments to compound until then.

If a traditional IRA nor a Roth IRA sound capable of meeting your retirement goals, consider exploring the benefits of a self-directed IRA.

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Set aside money for retirement-and save on taxes-with a traditional or Roth IRA.

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FAQs about how to start a Roth IRA

Still have questions about how to start a Roth IRA? We’ve got answers.

What does IRA stand for?

IRA stands for individual retirement account.

How does a Roth IRA work?

Investors contribute taxed funds into their investment account and can then make tax-free withdrawals after they reach the age of 59 ½ years old.

How much money do you need to start a Roth IRA?

The answer depends on which Roth IRA account you choose. You will potentially have to pay registration fees, account minimums, trading fees, and withdrawal fees.

Can I open a Roth IRA myself?

Yes, you can open a Roth IRA on your own. However, you should speak with a financial advisor to ensure you are aware of the rules and obligations of the account.

Where can I open a Roth IRA for a beginner?

A beginner can open a self-directed account or a Roth IRA on an investment platform.

Can I open a Roth IRA at my bank?

Yes, you can open a Roth IRA at the same bank as your traditional IRA.

How much can you put in a Roth IRA?

You can make the full IRA contribution limit of $7,000 if you meet the IRS requirements. Those over age 50 can make an additional catch-up contribution of $1,000 for a total annual contribution limit of $8,000.

Is a Roth IRA or 401k better?

A Roth IRA might be a good option for investors who want to pay tax on their earnings today, in exchange for tax-free distributions in the future. If they plan to be in a higher tax bracket once they retire this can be a good strategy. However, if your employer offers a 401k matching contribution you may want to start investing in the 401k until you qualify for the maximum matching contribution from your employer. This will increase your retirement savings by accumulating dollars contributed from your employer. Everyone’s situation is unique, and the answer depends on your financial goals, tax situation, and retirement plans.

The post How to Start a Roth IRA: A 5-Step Guide for 2024 appeared first on Stash Learn.

Investors who choose Roth IRAs enjoy benefits like no required minimum distributions, no-penalty contribution withdrawals, and tax-free growth. Additionally, you can open a Roth IRA account even if you already have a 401(k), which can help you put more money toward retirement. Especially if you predict that your marginal taxes will be higher in retirement than they are right now, a Roth IRA could be a retirement savings option worth looking into.

In the upcoming sections, we’ll dive into Roth IRA mechanics, eligibility, contribution limits, withdrawal rules, and optimization strategies. Armed with this understanding, we hope you’ll leave this page feeling more confident about the next steps in your retirement journey.

In this article, we’ll cover:

• How money grows in a Roth IRA
• Who can open a Roth IRA
• Contribution limits
• Withdrawal rules and penalties
• How to get the most out of a Roth IRA

How your money grows in a Roth IRA

So how does a Roth IRA work? A Roth IRA’s purpose revolves around long-term retirement savings. You contribute after-tax funds and have the flexibility to allow your money to grow tax-free for as long as you choose. This growth emanates from two sources: 

1. The contributions you make 
2. The returns generated by investments

One of the driving forces behind the popularity of Roth IRAs is their historical average returns, which have ranged between 7% and 10%. This track record has made them an appealing investment account in addition to the tax-free growth. 

However, it’s important to remember that investments inherently carry risks due to market volatility and other variables. Past performance doesn’t ensure future results. This makes portfolio diversification vital to your retirement and investment strategy. 

Diversification is a key strategy to mitigate risk within your Roth IRA. By allocating your investments across a spectrum of assets, such as stocks, bonds, and mutual funds, you can reduce the impact of poor performance in any one area. Diversification isn’t a guarantee against losses, but it can help balance the overall risk in your investment portfolio.

Investment options

The funds you contribute to your Roth IRA can be invested in a wide variety of assets, including: 

• Stocks: Investing in shares of publicly traded companies.
• Bonds: Allocating funds into fixed-income securities issued by governments or corporations.
• Mutual funds: Pooled investments managed by professionals, offering diversification.
• Exchange-traded funds (ETFs): Similar to mutual funds but traded on stock exchanges.
• Money market funds: Investments in short-term debt securities, often considered low risk.
• Certificates of deposit (CDs): Time-bound deposits with fixed interest rates.
• Annuities: Insurance products providing regular payments, ideal for guaranteed income.
• Real Estate (with restrictions): Holding real estate properties within your Roth IRA, subject to certain limitations.

There are some types of investments that aren’t allowed, such as life insurance, collectibles, and derivative trades with unlimited risk. And while you can hold real estate in your Roth IRA, you can’t benefit directly from the property by living in it or receiving rental income.

Who can open a Roth IRA?

Anyone who has earned income, no matter their age, can contribute to a Roth IRA. However, there are income restrictions and contribution limits to consider. Regardless of your age, you must earn below a certain dollar amount annually, either as an individual or as part of a married couple, to contribute to a Roth IRA. 

The true advantage of beginning a Roth IRA journey early lies in the extended period for potential growth. Even if retirement feels distant, every year contributes to your investment’s growth potential. Starting early allows your contributions more time to compound, potentially resulting in significant financial gains over time. This extended view toward the future can make a difference in your overall retirement savings.

By grasping the flexibility and rewards of starting a Roth IRA sooner rather than later, you set yourself on a path toward maximizing the benefits of this powerful retirement investment tool.

Income limit

The IRS stipulates income limitations for contributing to a Roth IRA. As of 2023, single filers with an annual adjusted gross income (AGI) under $120,000 can contribute the full amount allowed by the IRS. Single filers earning between $138,000 and $153,000 can contribute, but the contribution limit is lower. And those earning $153,000 or more are not eligible to contribute to a Roth IRA. If you’re married and filing jointly or a qualifying widower, your combined AGI must fall below $228,000 to contribute; if your AG is over $218,000, the amount you can contribute is lower.  

Income loopholes

There is a loophole that allows high earners to get around the income limit and reap the tax benefits of a Roth IRA by making indirect contributions. This strategy, known as a “backdoor IRA,” involves making a contribution to a traditional IRA and then converting that account to a Roth IRA. The income threshold does not apply to account conversions, and you can repeat the process each year.

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Roth IRA contribution limits

Annual contribution limits apply to every Roth IRA account holder regardless of age or income. Contributions as of 2023 are limited to $6,500 per year until age 50, at which point you can start contributing up to $7,500 annually. If you earn less than the contribution limit, you can only invest up to the amount of your total taxable income for the year. And if your AGI falls into the range that reduces your contribution limit, the IRS provides a worksheet for determining your Roth IRA contribution limit based on income.

Withdrawal rules and penalties

With a Roth IRA, the IRS makes a distinction between the post-tax money you’ve contributed and the money your contributions have earned while invested in the account. You can withdraw your contributions at any time with no penalties. However, the downside of a Roth IRA is that there are strict regulations regarding when you can withdraw your earnings.  

A Roth IRA is a retirement account, and IRS regulations are designed to encourage you to keep your money invested until you reach retirement age. In most cases, withdrawing your earnings before age 59½ will incur a 10% penalty; you’ll also have to pay income tax based on your tax bracket. In addition, you must have had your Roth IRA for five years before you can withdraw earnings without penalty, regardless of your age. That said, there are some exceptions to the early-withdrawal penalties for IRAs, including purchasing your first home or paying for some education expenses.

While there are rules governing qualified distributions, you’re not actually required to withdraw funds from your Roth IRA. Unlike a traditional IRA, which mandates that you must begin taking distributions at age 72, a Roth IRA allows you to keep your money in your account indefinitely. 

What are qualified distributions?

Qualified distributions are the tax-free, penalty-free withdrawals of earnings from your Roth IRA. In practice, this generally means the withdrawals you make after you’re 59½. That said, there are a few situations in which a withdrawal is considered a qualified distribution even if it’s taken early: it qualifies for an exception, you become permanently disabled, or the distribution is made to a beneficiary or your estate after your death. 

How to get the most out of a Roth IRA

Unlocking the full potential of a Roth IRA involves strategic decision-making and a keen understanding of they work. One of the most powerful drivers of growth within a Roth IRA is compounding, a phenomenon where your contributions accrue earnings over time. Let’s explore how you can leverage this effect and optimize your Roth IRA.

The earlier you start building your retirement savings, the more time your money has to grow. Even if you can’t immediately contribute up to the annual limit, starting as early as possible gives your investments more time to compound. This compounding effect magnifies over the years, turning relatively modest contributions into substantial sums later down the road.

Here are some steps that can play a pivotal role in getting more from your Roth IRA:

• Automate contributions: Set up automatic contributions to your Roth IRA. This habit ensures consistent savings and minimizes the temptation to skip contributions.
• Rule adherence: Follow Roth IRA rules to avoid unnecessary penalties. Over-contributions and early distributions can erode the benefits of your account. Familiarize yourself with these regulations to ensure your Roth IRA remains a valuable asset.
• Maximize annual contributions: Strive to contribute the maximum allowable amount each year. As of 2023, this sum is $6,500 (or $7,500 if aged 50 or above). Regular contributions bolster the growth potential of your Roth IRA over time.
• Stay informed about contribution limits: Be aware that contribution limits can change annually based on inflation. Staying up-to-date ensures you’re taking full advantage of available allowances.

The essence of a Roth IRA lies not just in its tax benefits, but in your proactive efforts to seize its potential and secure your future.

Invest in your retirement today

A Roth IRA can be a valuable way to grow your nest egg for the future. And it doesn’t have to be your only source of retirement savings. You’re allowed to have a traditional IRA, a 401(k), and other investments in conjunction with your Roth account. 

It’s never too early to start saving for the future. With a variety of retirement accounts and investment options, Stash makes planning for the future easier, regardless of your current income level. 

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However, unlike traditional IRAs, the Roth IRA is subject to an annual income limit and other factors that may impact the amount you can contribute or your ability to contribute at all. Knowing your contribution limit is important, as you can incur penalties if you contribute more to your Roth IRA than is allowed based on your income and filing status. Currently, the IRS charges a 6% excise tax for every year a contribution that exceeds the limit stays in your account.

Factors that affect your contribution limit

Things like age, annual income, and tax filing status affect IRA contribution limits. Roth IRAs are subject to more potential limitations on contributions than traditional IRAs.

• Age: Anyone with taxable earned income is eligible to contribute to a traditional or Roth IRA, regardless of age. Investors under the age of 50 may contribute up to the annual limit, and investors over 50 may put in an additional $1,000 catch-up contribution each year.
• Modified adjusted gross income: If you have a Roth IRA, your modified adjusted gross income (MAGI) affects your contribution limit. Your MAGI is your total gross earned income minus some specific deductions. For single tax filers in 2023, if your MAGI is less than $138,000 and you meet certain IRS filing status requirements, you can contribute up to the annual limit to your Roth IRA. Higher or lower MAGIs, in conjunction with tax filing status, may reduce or zero out the amount you’re allowed to contribute. If you have a traditional IRA, your MAGI does not affect your contribution limit.
• Filing status: Your tax filing status is also a factor in your contribution limit for a Roth IRA, but not a traditional IRA. If you are single or married and filing jointly and within the MAGI limits, you may contribute up to the annual limit for your Roth IRA. Some other filing statuses may reduce or zero out the amount you’re allowed to contribute, depending on your MAGI.
  Contributions to other IRAs: While you can have both a traditional IRA and a Roth IRA simultaneously, the contribution limits apply to your combined IRA contributions. For example, if you are eligible to contribute $6,500 for 2023, that’s the total amount you can contribute to all your IRAs combined; you cannot contribute $6,500 to a traditional IRA and another $6,500 to a Roth IRA. 

Calculating your modified adjusted gross income

Calculating your MAGI may seem a little complicated, so here’s a quick rundown. First, you should calculate your annual adjusted gross income (AGI), which encompasses all your earned income for the year, including wages, tips, royalties, alimony, retirement income, business income, interest, capital gains, and dividends, minus certain tax-deductible expenses. 

Once you’ve calculated all of your earnings for the year, you will subtract applicable business expenses, retirement plan contributions, student loan interest payments, educator expenses, HSA contributions, and other allowed deductions. This is your AGI. 

To calculate your MAGI, start with your AGI, then add back the deductions specific to your situation outlined by the IRS. The IRS provides a handy worksheet for calculating your MAGI, and you’ll just need info from your tax documents to fill it out.

Roth IRA contribution limits by filing status

The IRS adjusted traditional IRA contribution limits for 2023, increasing the annual limit to $6,500 for investors under 50 and $7,500 for investors 50 and older. However, contribution limits vary according to tax filing status and MAGI.

Single, head of household

You can choose single filing status if you’re not legally married. And, If you meet certain conditions, you may also choose to file your taxes as head of household. To claim head of household status, you must be legally single or living apart from your spouse for the last six months of the year, pay more than half of household expenses, and have either a qualified dependent living with you for at least half the year or a parent for whom you pay more than half their living expenses.

Single or head of household filers with a MAGI of less than $138,000 may contribute up to the yearly limit for a Roth IRA. Those who earn more than $138,000 but less than $153,000 may contribute a reduced amount, and those earning more than $153,000 are not eligible to contribute to a Roth IRA. These limits also apply to those filing as a qualifying widow(er).

Married and filing jointly

Filing jointly means that you and the person to whom you are legally married file a single tax return that includes all income and deductions for both people. If your joint MAGI is less than $218,000, each spouse may contribute up to the limit to Roth IRAs. Your contribution limit will be reduced if your joint MAGI falls between $218,000 and $228,000. Neither of you will be eligible to contribute if your joint MAGI exceeds $228,000 annually. 

Married and filing separately

If you’re married filing separately, you and your spouse each file your own tax return. This requires separating your income and deductions. In this case, your contribution limit will be reduced, and you won’t be able to contribute at all if your MAGI is over $10,000.

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Traditional IRA deduction limits by filing status

Contribution limits for traditional IRAs in 2023 are the same as those for Roth IRAs: $6,500 if you’re under 50 and $7,500 if you’re 50 or older. However, your MAGI and tax filing status don’t come into play when determining your contribution limit for a traditional IRA.

Deduction limits are a bit more complicated. Unlike with a Roth IRA, you can usually deduct some or all of your traditional IRA contributions from your taxable income for the year. If neither you nor your spouse have an employer-sponsored retirement plan, like a 401(k), you can take a full deduction up to your contribution limit. If you do have an employer-sponsored plan, however, the IRS imposes some limitations based on your MAGI and tax filing status. The tables below reflect traditional IRA deduction limits for 2023 if you or your spouse has a 401(k) or other employer-sponsored retirement plan.

Single, head of household

Single or head of household filers with a MAGI of $73,000 or less may take the full deduction, but those who earn $83,000 or more are not eligible. 

Married and filing jointly

If your combined MAGI is $116,000 or less, you may take the full deduction up to the amount of your contribution limit. Couples with a MAGI higher than $136,000 are not eligible for a deduction.

Married and filing separately

If you and your spouse are married and filing separate tax returns, your deduction limit will be reduced. Filers with a MAGI of less than $10,000 are eligible for a partial deduction, while those earning $10,000 or more are not eligible.

It’s never too early to think about retirement

Whether you choose a Roth IRA, a traditional IRA, or another type of retirement savings account, it’s never too early to start investing. The longer your money is invested, the more time it has to grow. Factors like inflation and penalties for early withdrawal may affect your retirement account balances over the years, so it’s wise to research all your options.

You don’t have to choose just one way to save for retirement, either. Remember that you can have more than one IRA, as well as an employer-sponsored retirement plan like a 401(k), all at the same time. In fact, many people choose to contribute to both a 401(k) and an IRA in order to put away more money than IRA contribution limits allow.

Stash can help you prepare for retirement your way with both Roth and traditional IRA investment options. Start planning for your financial future today.

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Do you want to be a millionaire? Of course, who doesn’t?

Maybe it seems far-fetched, but it’s possible if you max out a Roth IRA. You might even be able to retire earlier than age 65. But even if you don’t start saving in your 20s or early 30s, you can still build quite the nest egg with this strategy.

Follow along to learn what it means to max out a Roth IRA, if this strategy is best for you, and how to get started.

What does it mean to max out your Roth IRA?

Maxing out your Roth IRA means contributing the maximum amount the IRS allows annually. In 2023, this means stashing away $6,500 yearly or $7,500 if you’re 50 or older.

While maxing out isn’t complicated, it’s not attainable or wise for everyone. We’ll cover when you shouldn’t max out your Roth IRA later.

6 Reasons you should max out your Roth IRA

If you’re able to, maxing out your Roth IRA is generally a good idea. But it’s wise to be informed before you make any financial commitment. To help you decide, we’ve outlined the benefits of maxing out a Roth IRA for you below.

1. You’re setting yourself up for retirement

The obvious reason for maxing out your Roth IRA is to set yourself up for a comfortable life in retirement.

Roth IRAs are a long-term investment, meaning you won’t see significant growth in the short term. You may not even be able to touch earnings until a certain period without facing a penalty.

It may seem unrealistic to put away a significant chunk of your salary for a time in your life that’s so far away. But if you continue to max out your contribution each year, your total investment may grow to be larger than your contributions. The rest is all tax-free earnings that have grown over time, and you can use it however you want.

The chart below shows hypothetically how much someone could have in their Roth IRA if they started maxing out their contributions at age 25. We calculated the results with an annual 7% return rate (the lowest average return rate). Though the chart starts at age 25, it’s never too early (or too late) to open a Roth IRA.

This chart hypothetically illustrates how investments may impact the long-term value of investing in the market, assuming an annual growth rate of 7% (compounded annually). This is purely an illustration of mathematical principles, and such results do not represent actual investing results and do not take into consideration fees, taxes, other account deposits, dividend reinvestment, time horizon, or economic factors which can impact performance. Diversification, asset allocation, and dollar cost averaging does not ensure a profit or guarantee against loss. Clients may achieve investment results materially different from the results portrayed. This example is for illustrative purposes only and is not indicative of the performance of any actual investment or investment strategy.

2. There are no withdrawal requirements

Some retirement accounts, like traditional IRAs and 401(k)s, have required minimum distributions (RMD). After you turn 72, you must withdraw a percentage from the account each year, even if you don’t need the cash. Roth IRAs don’t have RMD (unless passed on to an heir), meaning you can let it grow even after you retire.

If you need money before retirement, you can withdraw from your contributions without penalty. This is a benefit should you ever need a backup on your emergency fund—but it should only be used as a last resort. Withdrawing from earnings early is hit with a 10% tax penalty.

3. You can benefit from the current tax rate

With a Roth IRA, you pay taxes on your investment when contributing funds, not when you withdraw. Tax rates are ever-changing, so you can benefit from your current tax rate by maxing out a Roth IRA now. Your Roth IRA withdrawals won’t be touched if tax rates increase or you retire in a higher tax bracket.

Contributing post-tax dollars also gives you a clearer picture of how much money you will retire with since there will be no withdrawal fees after age 59 ½.

4. You may have wider access to investment types

Compared to some employer plans, you may have access to a broader range of investment types with a Roth IRA, making it an ideal choice to max out. With an employer plan, you are subject to the investments they offer. Since you can set up a Roth IRA, you have free range to select whichever you’d like—from stocks to index funds and more.

In further comparison, you may find higher expense ratios on employer-run retirement plans.

INVESTOR TIP: If offered, you should prioritize reaching your employer’s 401(k) matching limit before maxing out a Roth IRA. Employee contributions are extra money, so take advantage of the benefit.

5. It’s easier to max out your Roth IRA over a 401(k)

If you’re comparing a Roth IRA to a 401(k) from a numbers perspective, it’s easier to max out a Roth IRA over a 401(k). It comes down to contribution limits. Roth IRA contribution limits are $6,500 a year or $7,500 if you’re 50 or older. 401(k) contribution limits are much higher at $22,500 or $30,000 if you’re 50 or older. The Roth IRA’s lower contribution limit is more attainable to max out.

6. You can pass it on to heirs

Maybe you’re thinking, “Will I really use a million dollars in retirement?” If you live a frugal life, maybe you won’t. But another major bonus of a Roth IRA is that it can be inherited. If you pass with money left in your Roth account, your beneficiary will be thankful that you maxed out your contributions.

Roth IRAs work slightly differently once passed on to heirs, though. Beneficiaries don’t pay additional taxes on withdrawals on inherited IRAs. However, most require beneficiaries to withdraw the money within 10 years and meet RMD obligations.

When shouldn’t you max out your Roth IRA?

In some scenarios, maxing out a Roth IRA might not be the best investment decision. Some financial goals worth prioritizing over an IRA include:

• Building an emergency fund
• Saving for a specific event, like college or paying off debt
• 401(k) contributions to meet employer matching limits

Additionally, if you expect to be in a lower tax bracket when you retire, consider skipping a Roth IRA altogether. Instead, you can max out a traditional IRA.

How to max out your Roth IRA

Ready to maximize your retirement savings with a Roth IRA? Here are four simple steps on how to max out your Roth IRA.

1. Open a Roth IRA

Before starting a Roth IRA, you should consider which type of provider is best for you—an online broker or robo-advisor. If you’re savvy with investing and want to manage your assets yourself, opt for a broker. If you want to be hands-off, have a robo-advisor automatically invest and handle your account.

You can open a Roth IRA in a matter of minutes with Stash.

2. Estimate how much you’ll need to retire

Even if you plan to max out your Roth IRA, you should still calculate how much money you’ll need in retirement to determine if your IRA will meet your needs.

To do so, use a retirement calculator to determine how much you’ll need to retire by your ideal retirement age. This can indicate whether you should make additional investments or if your Roth IRA will suffice.

3. Know your limits

Don’t dive into maxing out your Roth IRA without knowing how it will affect your finances in the short term. While you want to live a comfortable life in retirement financially, you don’t want to struggle now, either.

Analyze your bank account to better understand whether you can afford to max out your Roth IRA. Then, create a budget to ensure you can still pay your bills and remain secure in your finances.

4. Determine your investment strategy

Once you have the account and a financial plan, you’re ready to select your Roth IRA investment strategy. If you opt for a robo-advisor, your contributions will be invested based on your risk tolerance. Otherwise, consider a mix of assets, such as bond index funds, growth stocks, and the S&P 500. A diversified portfolio helps mitigate investment risks.

Next, you’re ready to make contributions. You can contribute monthly, in one lump sum each year, or in whatever manner works best for you. If your financial situation changes and you can no longer keep up with maxing out your Roth IRA contributions, you can dial it back temporarily.

Separate from your Roth IRA, you should determine if you’ll need supplemental investments. You may have uncovered gaps between what you’ll need in retirement and the combination of your employer-sponsored plans and maxed-out IRA. In this case, you’ll want to plan how to address that difference. Investing in real estate, for example, might be a good option for you to bring in extra income in retirement.

Frequently asked questions

Still unsure if you should max out your IRA? Let us help.

Is it worth maxing out your Roth IRA?

Yes, it is worth maxing out your Roth IRA as long as reaching contribution limits won’t put you under financial stress now. The pros outweigh the cons in this scenario.

However, if your employer offers contribution matching, prioritize contributing to your 401(k) first, but only up to their matching limit. Then with your remaining budget, contribute to your Roth IRA.

Can you max out multiple Roth IRAs?

No, you cannot max out more than one IRA—Roth or traditional. Contribution limits cover all IRA accounts you may have. In a given year, the total contributions between all your IRAs can’t exceed $6,500, or $7,500 if you’re over 50.

If you exceed the contribution limit and don’t correct the error by the year’s end, you will be subject to a 6% penalty from the IRS.

Should I max out my 401k or Roth IRA first?

If your employer offers to match your 401K contributions, prioritize matching up to the limit your employer will contribute before maxing out your Roth IRA. It’s important to take advantage of the benefits you’re offered and employee matching gives you extra money.

Can you max out Roth IRA at once?

If your financial situation allows for it, you can max out your Roth IRA in one lump-sum. This strategy can let you take advantage of potential investment growth over time. However, investing smaller amounts regularly over time can help mitigate the impact of market fluctuations. This is known as dollar cost averaging.

What to do when you max out your Roth IRA?

If you have maxed out your Roth IRA before the end of the tax year, there are other retirement investment types you can turn to instead of pocketing the cash. You can:

• Increase your 401(k) or 403(b) contributions
• Contribute to a Roth 401(k) if your company offers it
• Invest in a spousal IRA if applicable

When can you contribute to a Roth IRA in 2023?

You have until Tax Day every year to contribute to your Roth IRA for the year prior. So for 2023, you can work toward maxing out your Roth IRA until April 15, 2024. Each January 1, you can contribute to the new year’s IRA. However, focus on maxing out the prior year’s contributions before contributing to the new year’s.

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Namely, gains—also called earnings—in traditional retirement accounts grow tax-deferred as long as you don’t make any withdrawals from the accounts prior to age 59 1/2.² Important note: All investing involves risk, and you can lose money with your investments. Gains are not guaranteed. 

What happens if you sell from a retirement account?

But if you sell some of your investments and withdraw the money prior to reaching the age 59 ½, the money you take out will be subject to regular income taxes, plus an additional 10% early-withdrawal penalty. Similarly, if you decide to close the account and sell all of your investments, you may have to pay the same penalty in addition to income taxes on the entire amount.

What about Roths?

There are some exceptions to this rule. Roth accounts are funded with post-tax dollars. You can withdraw contributions you’ve made at any time, without taxes or penalties before retirement age. You may, however, have to pay taxes and penalties if you withdraw any of your earnings prior to a five-year holding period.³ 

Good to know: The Internal Revenue Service (IRS) may waive the 10% penalty for early withdrawals from retirement accounts if you become permanently disabled, or to pay for medical expenses that exceed 7.5% of your income. Find out more from the IRS here and here.

Follow the Stash Way

Stash encourages you to follow the Stash Way, our investing philosophy which includes investing regularly, and investing for the long run. Planning for retirement is also a critical part of your financial plan. If you must close your brokerage account, consider something called a rollover, which means you transfer your retirement account from one financial institution to another. There aren’t likely to be any tax penalties or consequences for that. 

You can learn more about 401(k)s and IRAs here.

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It’s not as far fetched as it sounds. In fact, the odds are increasingly in your favor. A record number of individual retirement accounts (IRAs) and 401(k) accounts now hold $1 million or more, according to a new study by the brokerage firm Fidelity. It found that 441,000 of the IRA and 401(k) accounts that it manages held $1 million or more as of the fourth quarter 2019. The fourth-quarter total marks a 15% jump compared to the from the third quarter of 2019, when 382,400 retirement accounts held $1 million or more—a record at the time. 

Also on the plus side:  The average amount saved in a 401(k) or IRA increased 7% between the third and fourth quarters of 2019. Fidelity customers had an average of $112,300 saved in 401(k)s for the fourth quarter of 2019, up from $105,200 in the third quarter. Customers had an average of $115,400 saved in IRAs, up from $110,200.

(A higher number of 401(k)s had $1 million or more, compared to IRAs. A total of 233,000 401(k) accounts held $1 million or more while 208,000 IRA accounts held $1 million or more.) 

Fidelity is reportedly one of the largest retirement account providers, with a combined 27 million 401(k) and IRA accounts. 

What does it take to be a millionaire?

There are nearly 19 million millionaires in the United States, more than in any other country. Yet, the number of millionaires in the U.S. accounts for less than 1% of the population. 

Financial advisors and retirement organizations including the AARP often suggest that a range of $1 million to $1.5 million is a benchmark for retirement savings. While more 401(k)s and IRAs than ever have $1 million or more at Fidelity, only 1.6% of the accounts there hold $1 million or more.

What you need to have saved for retirement varies from person to person. Either way, it is important to know your goal for retirement savings and to account for those savings in your budget.

401(k)s vs. IRAs

While you plan for retirement, it is important to know the difference between the types of accounts.

A 401(k) is a qualified employer-provided retirement plan, meaning it satisfies federal tax guidelines for such plans. Often, an employer will provide this plan to employees with an additional perk, called a matching contribution. This means that employers match the funds you place into your account, generally up to a certain percentage, potentially allowing you to save more, faster.

As of 2020, you can contribute up to $19,500 annually to your 401(k) if you’re younger than 50 years old. You can contribute an extra $6,500 per year if you’re 50 or older.

When you contribute to your 401(k), you contribute pre-tax income. Once you start withdrawing from your 401(k) in retirement, typically at age 70½, you will pay taxes on that income.  

An IRA, on the other hand, is an individual retirement account that anyone who earns income can open up through a brokerage or financial institution. There are two types of IRAs: Traditional IRAs and Roth IRAs. 

Traditional IRA accounts provide some tax advantages, as your contributions are made from your income on a pre-tax basis.  Account owners pay taxes on the funds when they withdraw them.

You can contribute to a Roth with income after taxes have been deducted. In contrast to a traditional IRA whose withdrawals are taxed, Roth investors generally don’t pay taxes on withdrawals once they’ve reached retirement age.

As of 2020, you can contribute up to $6,000 annually to an IRA if you’re younger than 50 and up to $7,000 annually if you’re 50 or older.

Good to know: It’s probably easier to save $1 million or more in a 401(k) than an IRA. A 401(k) lets you put away more money, and if there’s an employer match on funds, it can all really add up over time.

IRAs are available to most people who earn an income, letting you put money away in an investment account on a tax-favorable basis. Since there’s no one matching your contributions, you may have to save more aggressively over time to get to your magic number.

Start saving early

The sooner you start saving in a retirement account, the more money you’re likely to have over time, thanks to a market principle called compounding. (You can find out more about how time in the market and compounding can help you here.)

If you haven’t started planning for retirement yet, it may be time to start planning. Try Stash’s retirement calculator to figure out how much you might need to retire and visit Stash Retire to assist in planning.

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