How do you know if you’re contributing the right amount to your Roth IRA each month?

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Mike Bernard, CFP® offers advisory services through KFG Wealth Management, LLC dba Korhorn Financial Group. This information is for general financial education and is not intended to provide specific investment advice or recommendations. All investing and investment strategies involve risk, including the potential loss of principal. Asset allocation & diversification do not ensure a profit or prevent a loss in a declining market. Past performance is not a guarantee of future results….(read more)

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Make Sure You’re Correctly Funding Your Roth IRA

Saving for retirement is an essential part of financial planning. And one popular tool for retirement savings is the Roth IRA. The Roth IRA offers several advantages, such as tax-free growth and tax-free withdrawals in retirement. However, ensuring that you are correctly funding your Roth IRA is crucial to maximize its benefits.

Here are some key considerations to keep in mind when funding your Roth IRA:

1. Eligibility Requirements: Not everyone is eligible to contribute to a Roth IRA. To qualify, you must have earned income, such as wages, salary, or self-employment income. Additionally, there are income limits that determine the maximum amount you can contribute or if you can contribute at all. It’s essential to review these requirements annually to ensure you meet the criteria.

2. Contribution Limits: The IRS sets annual contribution limits for Roth IRAs. As of 2021, the limit is $6,000 for individuals under 50 years old, with an additional $1,000 “catch-up” contribution allowed for those aged 50 and above. It’s crucial not to exceed these limits to avoid penalties. If you’re married, both you and your spouse can each have a Roth IRA and contribute up to the maximum amount.

3. Timing of Contributions: You have until the tax filing deadline, usually April 15th, of the following year, to make contributions for the previous year. For example, you can contribute to your Roth IRA for the 2021 tax year until April 15, 2022. However, it’s generally advisable to invest early in the year to allow for maximum growth potential.

4. Automatic Investments: Consider setting up automatic contributions to your Roth IRA. By automating your savings, you ensure consistent funding for your retirement account. You can typically arrange for automatic transfers directly from your bank account or through your employer’s payroll system. This approach eliminates the risk of forgetting or procrastinating on funding your Roth IRA.

5. Investment Options: Once you’ve contributed to your Roth IRA, it’s crucial to invest those funds wisely. Roth IRAs offer various investment options, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Your investment choices should align with your risk tolerance and long-term goals. It’s prudent to conduct thorough research or consult a financial advisor to help you make sound investment decisions.

6. Reaping the Benefits: The primary advantage of a Roth IRA is tax-free growth and tax-free withdrawals in retirement. It’s essential to understand the specific rules for withdrawals to avoid any tax implications. Generally, you can begin taking qualified withdrawals from your Roth IRA tax-free after reaching age 59½, provided you’ve held the account for at least five years. Withdrawing funds earlier may result in penalties or taxes on earnings.

In summary, funding your Roth IRA correctly is vital for maximizing its potential benefits. Be aware of eligibility requirements, contribution limits, and the timing of contributions. Consider automating your savings, choose appropriate investments, and understand the rules for withdrawals. By following these steps, you can ensure you’re on the right track to a well-funded and tax-efficient retirement.