How Much Should You Contribute to Your IRA?

Individual Retirement Accounts – or IRAs – (both Roth and traditional) are great investment vehicles for retirement for nearly everyone thinking of retiring someday, but figuring out which one you should use AND how much you should contribute are important questions that need answers…so here we go!

If you’re not employed by a company that offers a 401(k), 403(b), or similar type of retirement plan, then you should most definitely consider an IRA for retirement savings.  Picking which IRA (traditional or Roth) depends on when you’d like to pay the taxes for the money.  With a Roth IRA, you do not get a tax deduction now, but later on in retirement you get to withdraw your earnings and contributions TAX-FREE.  With a traditional IRA, you get a tax break now (lowering your taxable income) and then pay the taxes later in retirement when you withdraw money out of your IRA (I’m not covering the scenarios where you take your IRA money out prior to retirement age (59 ½) for simplicity’s sake).

Now the big question:  how much should I put away in my IRA (regardless of the type)?

The not-so-simple answer:  depends on your specific financial situation.

Here’s the contribution limits for 2015 (you have up until Apr. 15th, 2016 to make contributions for 2015):  $5,500 total (could be $3,000 in a Roth & $2,500 in a traditional, but total IRA contributions cannot exceed $5,500 in any one given year, as long as you have earned income greater than $5,500).  If you’re over age 50, you get to put an additional $1,000 away each year (so $6,500).

There are certain tax advantages, different types of investments to consider, possibility of retirement savings credits, considerations if you participate in a retirement plan through your current employer, how young you are, when you want to retire, etc. – that’s why it’s not an easy answer.   However – with the many shocking polls/statistics showing that a majority of Americans reach the age of 50 without having even $25,000 saved for retirement – this should serve as a wake-up call to people who want to live above their means and aren’t thinking about their financial futures.

Saving for retirement should be a priority for most people, so trying to put away as much as possible every year for your retired self makes a lot of sense.  Understanding the best ways to go about doing it (from an investment, planning, and tax perspective) can be complex, so either do a lot of homework on these topics or hire yourself a financial fiduciary who can guide you to the right decisions for your financial future.  After all, you don’t want your future self to be mad at your younger self for not saving enough to take care of you!

Find an experienced financial advisor who deals with IRAs on a regular basis, works for an RIA firm, earns his/her money from fees (NOT commissions), believes in having an abundance of investment choices for clients, and has the heart & demeanor of a teacher, NOT a salesman, and chances are you’ve found the right financial advisor to help you prepare and plan for retirement.

To learn more about Martin Federici, view his Paladin Registry profile.

Other posts from Martin Federici, Jr.