An IRA seems like a pretty straightforward way to save money for retirement. You save a little more than $5,000 per year in an account specially earmarked for retirement, choosing whether you’d like to make those contributions tax-free now—as you make them in a Traditional IRA account, or later when you withdraw them from a Roth IRA account. Simple enough, right?
It’s only simple if you manage to steer clear of the common assumptions people make about IRAs. Don’t make these mistakes that will keep you from getting the most benefit from your IRA.
- You assume that since it’s past the first of the year, you’ve missed the boat on contributing anything more to your IRA for last year. Nothing could be further from the truth! You have until April 15 to finish your contributions for the preceding year.
- You assume that once you’ve contributed $5,500, you’re capped for the year. That’s true if you’re younger than 50. Once you hit 50 years old, you’re eligible to kick in an extra $1,000 per year for a total of $6,500 per year.
- You assume you’ll fill up your IRA contributions with bigger payments later in the year—say, with your tax refund or during the summertime. Slow and steady has always been the smart way to save, and consistent payments will help ensure you hit the contributions cap every year. Why not set up an automatic payment plan?
- You assume that diversifying your savings is important, so you fall short of the maximum IRA contribution each year. Any type of saving is great, but some savings are better than others. Remember, contributions to your regular IRA are tax-deductible. If spreading your savings among several accounts and investments means falling short of maxing out your IRA contributions, you’re not taking advantage of the tax savings your IRA provides.
- You like the idea of a Roth IRA, but you assume it’s too late to change courses since you already have a traditional IRA. A Roth IRA flips the tax deduction associated with a Traditional IRA on its head. Instead of deducting what you contribute now and paying taxes when you withdraw the money later, you pay taxes on the money you put into a Roth IRA now but withdraw it later tax-free. The good news is that now you can convert your traditional IRA to a Roth IRA at any time, if you decide that better fits your financial situation. (Talk to a tax adviser, since the money you transfer will be taxable now.)
- You assume you can’t get an IRA because you’re a stay-at-home spouse and do not work. With a spousal IRA, your working spouse can contribute to an IRA in your name, as long as you file your taxes jointly. The amount you can contribute scales with your spouse’s income. A spousal IRA can be a smart tax savings tool if your spouse is covered by a retirement plan at work and can’t use an IRA.