First, allow us to give you a high five for taking your retirement savings seriously. Contributing to your IRA means that you’re taking advantage of a terrific way to save now for your retirement years later. The money you’re socking away is part of your strategic financial plan for the future. So when you reach your 70s, you’ll be prepared.
Even more good news: the money you contribute for these 12 months of the year can actually extend to
tax day (April 15). That means you may have another three and a half months to stash cash into your IRA.
There are two type of IRAs:
Traditional IRA: Those who qualify don’t pay tax now on their contributions (this is called pre-tax dollars). You only pay taxes on withdrawals on those contributions, after your retirement. The idea behind this strategy is that it’s presumed that your tax rate will be lower in retirement, therefore you pay less in taxes.
Roth IRA: This is different than a traditional IRA, because it’s funded with after-tax dollars. However, the withdrawals are not taxed.
It’s all about the taxes, or how to legally prevent overpaying. However, you may have learned by now that there is no such thing as a free lunch—or in this case, unlimited contributions to your IRA.
The limit on traditional IRA contributions in 2018 is $5,500 if you’re younger than 50. If you’re 50 or older, the contribution limit gets a little larger: $6,500.
If You Also Have a 401(k)
First of all, good for you! You’re really working it! Know that you can still contribute to your IRA (either traditional or Roth IRA) if you also have a 401(k). However, there is a small snag: There are income eligibility rules attached if you want to contribute to your 401(k) and an IRA.
Certain income limits mean you can’t benefit from a traditional IRA if you have an employee-sponsored plan, or if your spouse already has an employee sponsored plan. Yep, you can max out your IRA, but nope, you can’t deduct it from your regular income.
Traditional IRA contribution limits: If your earned income is less than the contribution limit ($5,500 for 2018 for those under 50), you can only contribute to your traditional IRA up to your earned income. You earned $2,500 in 2018? You can only contribute up to $2,500.
Roth IRA income limits: If you earn under $135,000 and are single , you can contribute to a Roth IRA, but contributions are reduced starting at $120,000. If you’re filing jointly, your combined incomes must be less than $199,000, with reductions starting at $189,000.
You Can Only Contribute “Earned Income” To An IRA
That means any work you did that earned you wages, salaries, tips, bonuses, and commissions. Self-employment income counts, too. What earned income is not: interest and dividends from investments, income from rental property, and pensions.
For those who haven’t yet started an IRA, it does seem kind of impossible, especially if you are young—and even more so if you have school loans, credit card debt, and other financial obligations. However, there is a way to make this work without having to contribute lump sums, all at once.
Here are just a few ideas:
Create An IRA Budget
Work backwards. First, figure out how much it would take to max out your IRA contribution, and calculate it on a weekly or monthly basis.
Once you find a contribution schedule that makes you comfortable, set up an automatic deduction from your bank account. It may hurt a little at first, but think of your sweet retirement future, and the potential tax savings you’ll be rocking this year.
Start As Soon As Possible
You know why, but it always helps to hear it again and again: the sooner your money goes into your IRA, the sooner your money has the opportunity to grow. Here’s another advantage, though: if you contribute to your IRA before the April 15 tax deadline, your contribution can count toward the past year. (For example, if you make your contribution on April 14, 2019, it can count toward your 2018 contribution.)
Sacrifice—But Not Too Much
It may take a little fancy footwork to create available money for your IRA contributions: cutting down on restaurants or shopping, but don’t cut your budget so close to the bone that it interferes with your everyday life.
Keep An Eye On Your Rainy Day Fund
Emergencies are going to present themselves long before retirement, so make sure you have an emergency savings account that’s easy to access.
Ideally, that account should cover at least six months of living expenses (or hopefully more). As awesome as it is to max out your IRA, be sure that your emergency fund is where it should be, and don’t touch that money unless you absolutely need it.
Increase Your Earnings
A part-time job or a side hustle could help earn you hundreds of dollars or more that you can put into your IRA. This strategy can also help you contribute to your max limit without putting a strain on your existing budget or living expenses.
This is a lot of information to digest, but don’t for even one moment think you have to go it alone. Our SoFi financial advisors are on call to help our members work this out and the service is complimentary.
Let us help you start planning for retirement today. We’ll help you map out a sensible plan that has your goals in mind. We’ll actively manage your automated accounts, and rebalance them when life or priorities change.
Even better: When you become a SoFi Invest® member, you’ll gain access to over 200 complimentary and exclusive SoFi events, and professional career and salary guidance.
You can invest with a minimum of just $100; there is no minimum holding period and you can withdraw your money at any time.
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This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice about bankruptcy.