How to Get the Most Out of Your Roth IRA

5 ways to maximize savings from this tax-advantaged tool.


The way this economy is going, no one feels confident managing investments. At least most of us have figured out whether we should have a traditional IRA or a Roth. If you chose a Roth, then you figure today’s tax rate is lower than the one you’ll pay in your golden years when you’ve reached retirement age and it’s time to withdraw. You might have just decided you would rather know you‘d have tax-free money in your golden years.

If you have not yet made up your mind about a Roth IRA, you should learn all you can about these tax-protected accounts. The government is making it easy to rollover your traditional IRA this year, even giving you the chance to change your mind if you decide it is not for you. That could change next year, so 2011 is definitely the year to do it.

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The hardest part about a rollover is coming up with the taxes you have to pay on the money you put in so far. If you are young, it should be easy, but those in mid-career might find it hard. If you just do not have the money, the best course might be to just start a Roth and keep both accounts. However you acquire a Roth IRA, here are five tips for getting the most out of it.

1. Say, “Yes” to Free Money

If your employer matches your contributions, then you should be entering the maximum contribution they will match. Confirm the limit with your HR department rather than assuming the rate is the same as it was when you enrolled. Understand however that your employer can only make pre-tax contributions to match. That means the amount contributed will be a little less than a perfect match, after taxes are taken.

2. Don’t Limit Yourself

Even though the IRS limits your Roth IRA contributions to $5,000 ($6,000 if you are age 50 or older), that is no reason to avoid socking away additional funds in another investment account. Take your retirement into your own hands. You will have to pay taxes on gains from your own IRA, but that is no reason not to save extra money for retirement.

3. Watch Your Tax Bracket

Contributing to a Roth 401k or IRA is great until your income puts you into a higher tax bracket. If your employer is not matching contributions, then you should have the funds automatically withdrawn to a savings account, rather than directly into the Roth. At the end of the year, you can see if contributing the funds to a traditional IRA might be better, potentially saving you thousands in taxes. You can then take that tax savings and put in it towards next year’s Roth. No matter how you distribute your contributions, put in the full $5,000, the total allowed each year for all of your retirement accounts combined.

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4. Take Advantage of Your Roth IRA Freedom

One of the best advantages of a Roth IRA is greater flexibility. You can take out your contributions at any time, for any reason. Understand that you cannot withdraw the account’s investment earnings without penalty until you reach retirement age, but this is a handy umbrella should your emergency fund fall short. You can always pay it back, but the point is that you do not have to.

Once you reach retirement age, you can take as much as you need free of taxes. This can come in very handy when you are living on a fixed income from Social Security. Alternately, if you do not need to spend it, you can let the money stay in the account and grow. Unlike the traditional 401k, there are no minimum distributions at age 70 and one-half, so your Roth IRA can outlive you and go on to benefit your heirs.

5. Use the extra time

The IRA gives you until tax time to contribute to the prior year’s IRA. Use that time to scrape together any contributions you can. Whether you contribute solely to a Roth or share contributions between a Roth and traditional 401k, do your best to contribute the full amount allowed. When you reach retirement age, you will be glad you did.

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