We all have aspirations for retirement, like traveling the world, starting a passion project or moving to a new city. Opening an Individual Retirement Account (IRA) can help you pursue a comfortable retirement and all that comes with it. Consider taking these actions to help fund your retirement account.
Know your IRA choices
The two most common IRAs are traditional and Roth, with the main difference being how they are taxed. Traditional IRAs allow you to make tax-deductible contributions. Your money is then subject to income tax when you withdraw it, or take distributions, during retirement. Contributions to Roth IRAs are made with after-tax dollars, so you pay taxes now and withdrawals during retirement are tax-free.
Read more: Dive into the deeper differences between traditional and Roth IRAs.
If your employer offers a 401(k) plan, an IRA can offer added flexibility in your retirement savings. IRAs have certain benefits that 401(k)s don’t. For instance, certain early withdrawals (before age 59 ½) from an IRA won’t incur the 10% early withdrawal tax — including higher education expenses and up to $10,000 for first-time homebuyers.
How to start making IRA contributions
Once you’ve opened an IRA, it’s time to make a deposit, also known as a contribution. You can fund most IRAs with a check or a transfer from a bank account. The sooner you begin contributing, the more time your money has in the market. You can also put existing retirement funds into your IRA, which could be as a:
Transfer: moving funds between accounts of similar type, like from an IRA at one institution to an IRA at another
Rollover: moving funds between different account types, like from a 401(k) to a traditional or Roth IRA
Conversion: moving funds from a traditional IRA to a Roth IRA
To avoid paying unnecessary taxes, any existing retirement funds should go directly into the IRA without making stops in other accounts. However, note that rollovers and conversions will require you to pay taxes on any funds moving from a tax-deferred account (a 401(k) or IRA) to a Roth IRA, in which contributions are made after-tax.
IRA contribution guidelines
Remember: You must have earned income to open and contribute to any IRA. Other federal limits on annual contribution limits are based on your income, age, IRA type, filing status and other factors, which you should check each year, as they are subject to change. You can contribute to more than one IRA in the same year, but the total amount can’t exceed the annual limit set by the IRS, and contributions must be made by April 15 of the following year. Here are the contribution, income and age limits for 2024:
Roth IRA | Traditional IRA | |
|---|---|---|
Contribution limits | $7,000 age 49 and younger; $8,000 age 50 or older; or up to your taxable compensation for the year (if below $7,000) | Same as Roth IRA |
Income limits | Income affects how much you can contribute | Income does not affect how much you can contribute (but does affect how much you can deduct) |
Age limits | Contribute at anu age, provided you have taxable compensation for the year | Contribute at anu age, provided you have taxable compensation for the year |
4 ways to fund your IRA
Whether you see your future self on an international bus tour or in your backyard garden, you’ll want to come up with a plan to help you get there.
1. Account transfers
One way to contribute regularly is to use the power of automation. Consider setting up automatic transfers from your checking or savings account to your IRA on a schedule that works for you — maybe biweekly or once a month.
2. Direct deposits
Talk to your employer about depositing a portion of your paycheck directly into your IRA to pay yourself before you use your money for bills and other expenses. You will need to confirm whether your IRA has automatic transfers or payroll contribution capabilities.
3. Hit the limit
In general, you will only get the maximum tax benefit from making the maximum annual contribution to your IRA, but only you can determine what amount is realistic for you.
4. Consistent contributions
Regular contributions are a great way to keep your retirement momentum. Try to schedule account check-ins (possibly quarterly) to stay on track with your contributions. That way, you’ll have an idea whether you need to give your funding a boost or if you’re in good standing.
On your way to IRA
Making investments now toward your retirement is a strong financial decision — but it’s important to make sure you follow all the rules and regulations along the way. When you have the right information available, you’ll be even better prepared for the exciting future to come.
