Tips For Maxing Out Your IRA (And Why You Should Before April 15)
Last year, for the first time, my wife and I managed to max out our IRA — something we saw as a major money milestone for us. While I’d love to say that this move was motivated purely by wanting to be prepared for retirement (which of course we do), the truth is that the then-impending tax return deadline had a lot to do with that decision. Why? Because, in many cases, contributing to your retirement account can have a positive impact on your tax bill. In fact, because of this, the IRS even allows you to make contributions all the way up until April 15th and apply them toward the 2019 tax year.
With just a couple of months before that deadline, how can you reach that $6,000 maximum ($7,000 if you’re over 50) contribution limit? Let’s take a look at a few ideas to help you reach your goal — but first, it’s important to discuss why you would and why you wouldn’t want to max out your account.
Why You Should Max Out Your IRA (and What to Do Beforehand)
Before focusing on your IRA…
Have an emergency fund
As important as saving for retirement can be, it’s more important to protect yourself from financial hardships that may arise sooner. Therefore, I’d personally recommend having an emergency fund in place before striving to max out your IRA. What exactly a “fully-funded” emergency contingency means to you will depend on a few factors, but having three to six month’s worth of expenses in cash is usually a good rule of thumb.
By the way, I’m not necessarily saying that you shouldn’t save for retirement at all until you have an emergency fund in place — just that you should focus on the latter before trying to go the extra mile with your IRA.
Pay off high-interest debt
Investing your money in the stock market can lead it to grow by double digits in a good year. Yet it would take a pretty exceptional climb for you to so much as break even if were diverting funds to investments rather than paying down things like credit card debt. That’s because credit cards, personal loans, and some other debts carry notoriously high interest rates. Given this reality, it’s unlikely that you’ll want to worry about maxing out your IRA until such debts are eradicated.
As for other types of debts, it will be a judgment call as to what makes sense for you. For example, if you have a car loan with a relatively low interest rate (say, 3% to 4%), you may determine that saving for retirement is still more of a priority than paying off that loan early. Again, circumstances can vary greatly, so you’ll need to think it over for yourself.
Make the most of employer matching
If the company you work for offers a 401(k) plan, chances are that they also offer some type of employer matching. For example, they might contribute 4% of your annual salary to your 401(k) assuming you too set aside 4%. Of course, the vast majority of companies aren’t going to just straight-up double your pay, so there’s typically a cap on the percentage they’ll match.
As personal finance bloggers love to say, this is free money! Therefore, it’s in your best interest to make sure you’re doing whatever you have to in order to obtain the maximum matching amount from your employer.
To be clear, maxing our your employer matching is not the same thing as maxing out your 401(k). In fact, 401(k)s have far higher maximums than IRAs, so reaching that cap could be quite an undertaking. On that note, depending on what your 401(k) plan has to offer, it may be worth prioritizing it over an IRA — although that’s a topic for another day.
Reasons to reach your max
The power of compounding
You’ve probably heard time and time again that it’s important to start saving for retirement as soon as possible. That’s not just because more years of saving means a higher balance when you’re ready to retire but also because the compounding that takes place over the extra years can really supercharge your returns. Look no further than this example from Business Insider to see how compounding returns can make a world of difference — a $200,000+ difference. To paraphrase a popular Twitter meme, the best time to start saving for retirement was years ago; the second best time is now.
Possible tax deductions
Like I alluded to in my intro, there can be some tax benefits associated with making contributions to your retirement. For those with traditional IRAs, the money you put into your account before April 15th can actually be deducted from your taxable income, lowering your tax bill in the process. Keep in mind that the amount of your deduction may be reduced depending on your level of income and other factors, so be sure to check out the IRS site for more info.
Although Roth IRA contributions are not tax-deductible the same way Traditional IRA contributions are, they may still impact your taxes if you qualify for a Saver’s Credit. Intended to encourage those with lower incomes to still set aside money for retirement by rewarding them with a tax credit, this program can be quite lucrative if you qualify. Plus, unlike deductions that simply lower your level of taxable income, credits directly come off of your tax bill. Thus, the Saver’s Credit could save you as much as $3,000 if you max out your IRA.
Tips for Maxing Out Your IRA
Prioritize it in your budget
The first step in making an effort to max our your IRA is to prioritize that goal in your budget. This could mean looking for areas you can cut back in order to divert funds toward your retirement savings or perhaps even taking up a (permanent or temporary) side hustles to help boost your income. As for those who don’t use line-by-line budgets, the same principals can be applied as you look for ways to you can adjust your spending in order to build up your savings and reach your goal.
Look to auxiliary savings
If you’re anything like me, there’s a good chance you have several bank accounts that may have automated transfers set up. With this arrangement, I’ll often purposely neglect (but not forget) to check on these accounts, opting to let them continue to quietly grow instead. Then, I’m delightfully surprised when I find funds waiting for me when I need/want them.
Assuming you too have some extra savings, checking, PayPal, Venmo, Square Cash, or whatever accounts just waiting around, it can’t hurt to look and see if you might be able to locate some cash you can send along to your IRA before tax day.
Raid your credit card rewards
Another potential place you could turn to retirement savings is your credit card. No, I’m not suggesting your charge an IRA contribution to your plastic — but that you may have some earned rewards lying around that could be put to good use. For those with cashback credit cards, it may be worth taking a closer look at your rewards balance. Remember: even a few hundred dollars can be a nice boost when climbing toward your goal.
As for those with points-based rewards cards, it may also be a good idea to cash those points out and put the money into your IRA. That said, you’ll want to pay close attention to the redemption rate you’re getting for those points as some cards make this a less than optimal move. Therefore, you may need to weigh the pros and cons of cashing out.
Start setting money aside now
Two months is just not enough time to scare up $6,000 in savings? I hear you. However, if maxing out your IRA this year just isn’t in the cards, it’s never too early to start planning for next year.
Looking ahead, you may want to consider trying automated savings apps such as Clarity Money, Long Game, Digit, or — one I’ve just recently heard about — Astra. While each of these tools differs a bit in their approach and features, all of them can help you get into the habit of setting money aside and make the process as painless as possible. So, although I’d still contribute what you can to your IRA before April 15th this yeat as well, hopefully these apps or other tools you come across can help you meet the maximum next time around.
Apply your tax refund toward maxing out next year
Once again, meeting the April 15th deadline for contributions toward the 2019 tax year may be too tall a task. But what about using your tax refund to help you get a jump start on saving up for next year? Of course, we’ll overlook the pros and cons of having a tax refund in the first place for now and just say that using your found funds in this way can be a very smart move.
If you’d like to boost your retirement savings and potentially save some money on your tax bill in the process, you have just over two months to make a contribution to your IRA. Of course, if this isn’t a viable option for you this year due to debt, lack of savings, etc., it’s definitely worth considering for tax year 2020. Not only could these actions make for a better tax season but could also lead to a more pleasant retirement.
Also published on Medium.