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Available as traditional or Roth accounts, individual retirement accounts (IRAs) are valuable tools for retirement savings. They offer tax benefits in exchange for putting aside money for your golden years.
However, contributions to IRAs are capped at $6,000 per year for most people, and that can make it difficult to amass the $1 million some people suggest is needed for retirement.
Still, you can maximize your IRA contributions – both this year and over time – by using these tips.
1. Understand your IRA options
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Start by determining whether you are eligible to open a specialized IRA with a higher contribution limit.
“Self-employed people can actually contribute to a SEP IRA,” says Rafael Rubio, president of Stable Retirement Planners in Southfield, Michigan.
Simplified Employee Pension (SEP) plans, also known as SEP IRAs, allow workers to save 25% of their compensation, up to $58,000 in 2021, in a tax-advantaged account.
2. Don’t miss out on catch-up contributions
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Once you hit a certain age, you’re eligible to make catch-up contributions to traditional and Roth IRAs.
“If you’re 50, you can contribute another $1,000 a year,” explains Edward Gottfried, director of product management for Betterment for Business, an online platform offering 401(k) administration services.
That means everyone age 50 and older can contribute a total of $7,000 to their IRA for 2021 and 2022.
3. Take advantage of a spousal IRA
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Normally, you need to earn taxable income to contribute to an IRA. However, there is an exception for spouses. A non-working spouse can set up and contribute to an IRA so long as their husband or wife has taxable income.
“That’s contingent upon you filing your taxes jointly,” Gottfried notes.
If you file your taxes separately, you’ll miss out on this opportunity. The other caveat is that total IRA contributions can’t exceed the taxable income reported on your joint return.
4. Make regular contributions throughout the year
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If you wait for a year-end bonus to make your annual IRA contribution, you could be shortchanging yourself.
“Generally, the advice we give is that people make small monthly contributions,” Gottfried says. Known as dollar-cost averaging, this practice makes savings a habit and can lead to more efficient investments.
What’s more, it may help your IRA grow faster.
“It makes sure each dollar spends as much time as possible in the market,” according to Gottfried.
5. Start contributing as early as possible
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