Roth IRA contribution limits (2022)

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Tax season is officially in full swing, with the IRS now accepting tax returns. But before you deposit, did you know that you can still contribute to your Traditional or Roth IRA until April 15, 2022?

This is the last day to contribute to your IRA against the $6,000 maximum in 2021 (or $7,000 for investors age 50 or older). Depending on the type of IRA you have — traditional or Roth — you can get tax savings or boost your tax return, or get a boost toward tax-free retirement savings. And you’ll still have the rest of 2022 and until April 15, 2023 to maximize contributions for that tax year.

Whether the traditional or Roth IRA is better “depends on where your tax brackets fall and whether or not IRA contributions will be deductible,” says Gina McKague, founder of McKague Financial.

If you are single and have an adjusted gross income (AGI) of $76,000 or more and have access to a workplace pension plan, you will not receive any deductions on your current year taxes . If you don’t have access to a workplace retirement plan, you can deduct your traditional IRA contributions and reduce your taxes.

Based on these factors, a Roth IRA may be a better idea if you are under the Roth IRA income limits.

Let’s talk about how to take advantage of the extra contribution time to set yourself up for success.

Benefits of a Roth IRA

With any IRA, you put money in, invest the money, and then make withdrawals when you retire. The advantage of a Roth IRA is that your money grows tax-free and there’s no tax on your withdrawals because you’re contributing with after-tax money – money you you have already paid taxes.

“A Roth IRA will never be taxed,” says McKague. “Going forward, you’ll never have to settle with the IRS or accept required minimum distributions, so you can keep your money for as long as you want.”

When you reach age 59.5, you can receive distributions without paying contribution and income tax. Before reaching this age, you can withdraw your contributions (but not your earnings) without penalty, although there are certain situations where you can withdraw your money (including earnings) without paying taxes or penalties after your account has been open for five years, such as when you:

  • Buy, build or rebuild your first home
  • Pay unreimbursed medical expenses that represent more than 7.5% of your adjusted gross income
  • Paying medical insurance premiums while you are unemployed
  • Pay eligible education expenses

Another huge benefit of the Roth IRA is that you don’t have to claim your withdrawals from the IRS because they don’t count as income. With a traditional IRA, not only do you pay taxes, but distributions can also change your tax bracket and affect your other income, such as Social Security, McKague points out. In her experience, she has seen clients avoid withdrawing their funds because they don’t want to affect their other assets, which defeats the purpose of saving for retirement. A Roth IRA, she says, can provide mental security and peace of mind.

Benefits of a Traditional IRA

The biggest advantage of a traditional IRA is that you can reduce your income taxes for the current year by contributing to it. You’re essentially saving on your taxes now, but paying taxes regardless of what income bracket you’re in when you make a withdrawal.

For most people, their tax bracket is lower in retirement than during their peak earning years, so this is usually a good trade-off, but not always. A traditional IRA may be better if it puts you in a lower tax bracket in the year of your return or if you want a larger tax refund, but consider that traditional IRAs require you to make the required minimum distributions from 72 years old.

Because you will pay taxes when you withdraw from a traditional IRA, the amount you see in your account is not the amount you will end up with. That’s not true for a Roth IRA, which lets you withdraw your money tax-free whenever you turn 59½ or older. All winnings are yours.

2022 Roth IRA contribution limits

Single registrants (MAGI) Married joint deposit (MAGI) Groom Filing Separately (MAGI) Maximum contribution for individuals (under 50) Maximum contribution for individuals (50 years and over)
less than $129,000 less than $204,000 $0 $6,000 $7,000
$130,500 $205,000 $1,000 $5,400 $6,300
$132,000 $206,000 $2,000 $4,800 $5,600
$133,500 $207,000 $3,000 $4,200 $4,900
$135,000 $208,000 $4,000 $3,600 $4,200
$136,500 $209,000 $5,000 $3,000 $3,500
$138,000 $210,000 $6,000 $2,400 $2,800
$139,500 $211,000 $7,000 $1,800 $2,100
$141,000 $212,000 $8,000 $1,200 $1,400
$142,500 $213,000 $9,000 $600 $700
$144,000 or more $214,000 or more $10,000 or more $0 $0
Charles Schwab

Maximize your IRA in 2022

The key to maximizing your IRA is to make it worthwhile and contribute regularly. Whether your reason is to save for a comfortable retirement, to create a generational wealth, to give your money time in the market, or to practice financial discipline, you’ll want to be clear about your reason for saving.

Pro tip

You have until April 15, 2022 to add funds to your Traditional or Roth IRA and count them toward your 2021 contribution limit. This gives you an extra chance to save even more for your retirement in 2022.

In 2022, the contribution limit for traditional and Roth IRAs is $6,000. If that sounds like a big number, you can contribute $500 a month to reach the maximum — or whatever amount fits your budget. Don’t forget that you have until April 15, 2023 to maximize your 2022 contributions.

Here are some guiding principles to remember.

Recurring purchases by fixed sums

Averaging simply means contributing at regular intervals despite market performance. Some people like to make a lump sum contribution or save money to time the market and buy low. According to FINRA, dollar cost averaging performs better 66% of the time.

In addition to controlling your exposure to risk, it is also a way to control your emotions. Everyone wants to time the market, but contributing regularly through dollar cost averaging is a healthy way to keep contributing to your IRA.

Automatic contributions

Speaking of dollar cost averaging, the best way to do that is to make your contributions automatic. Whether through automated transfers, payroll deductions, or saving a portion of each paycheck, if you can create an automatic habit of saving, it becomes second nature. If you can contribute directly to your paycheck, you’ll probably never miss it, but you’ll put your money to work right away, whether it’s $500 per month, $100 per paycheck, or any other amount that works for you. your finances.

Don’t forget to save both and invest your money. Contributing does not always mean that your money is invested. If you have to take that extra step to buy investments, be sure to add it to your routine.

Secondary activities and additional income

Earning extra cash with side hustles is a great way to boost your retirement funds and give you more time for your money to grow.

If you’re going in this direction, it’s best to have an amount in mind, whether it’s weekly, monthly, or whatever schedule you decide on. And while it’s good to save money for your future self, it’s good to set boundaries so you don’t exhaust your current self in the process.

It’s important to prioritize your time, have a clear “why” and choose the right side. And because spending time in the market is better than timing the market, the sooner you can start saving, the longer your investments will need to grow.

If you are currently employed, you might also consider asking for a raise or changing jobs to increase your income. Remember to keep the lifestyle in check – that means saving your extra cash instead of splurging on unnecessary upgrades.

And one last thing. If you want to go ahead and file your taxes, you can transfer your refund directly into your IRA to keep the contributions flowing – it’s a win-win for your current and future finances.

About Ian Crawford

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