As the time for retirement approaches, it becomes more essential to make the most of your investments for retirement. With IRAs, the closer you get to retirement, the more you should contribute to those IRAs. That is how you can substantially increase your retirement savings. If you can maximize IRA contributions, you will be able to get the most out of that investment.
Know your IRA Contribution Limits
The maximum contribution limits for each year depend on the type of IRA you have. This year, 2015, the maximum contribution that can be made to a Traditional or Roth IRA is $5,500. The maximum for a SIMPLE IRA is $12,500. With employer-sponsored IRAs, there is a minimum that must be contributed in order to qualify for the maximum employer matching contribution. However, the matching contributions do not count against your contribution limits.
Find out whether you are eligible to make “catch-up contributions”
Anyone who is age 50 or older is allowed to contribute an extra $1,000 each year, as a “catch-up contribution. This allowance applies to every year following your 50th birthday. So, if you make those catch-up contributions and you retire at age 65, you would have earned an extra $15,000 in contributions toward your retirement.
Make contributions as early as possible
The deadline for making IRA contributions each year is April 15th, however, the earliest you can make a contribution is January 1st. Your money begins to earn on a tax-deferred basis as soon as your contribution is made, so making it as early as possible is key to maximizing your contributions. If you do this consistently, you could earn an extra annual contribution over your working career.
Be sure to invest your IRA wisely
IRAs typically become a significant portion of your net worth. Therefore, the decisions you make regarding the investment of your IRA is as important as all other investments you may have. You should always include your IRA in your overall investment planning.
Another consideration is whether to take the long-term approach to your IRA investment. Because your funds remain in your IRA for an extended period of time, it is better to use lower risk, fixed income investments, such as a long term CD, as opposed to a short term savings account.
Early retirement planning will really pay off
Some clients wonder if it is really worth it to go through the trouble of trying to make the maximum contributions possible. Consider this: if you contributed only $1,200 each year to your IRA, for ten years with compounded interest of 6%, you would save approximately $16,766 at the end of that 10-year period.
If you contributed the maximum $5,500 every year, for the same 10-year period, your savings would be closer to $76,844. In essence, you may be able quadruple your retirement savings, by taking the simple steps discussed here. The choice is easy.
If you have questions regarding IRA contributions, or any other retirement planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.