Are You Maximizing Your Roth IRA? Answer 3 Key Questions to Find Out

The Roth IRA (individual retirement account) receives a lot of praise for the compelling tax-free perks you can unlock during retirement. That’s a sweet deal, but if you aren’t using the Roth IRA to its full potential today, you’ll limit the benefits you can tap into later.

Here are three questions you should ask yourself to make sure you get the most out of your Roth IRA.

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1. How much are you contributing to your Roth IRA?

It’s important to know how much you want to contribute for the year, and have a game plan to reach your goals. It’s also important to know your limits, so you won’t be subject to unexpected taxes and penalties.

For 2022, you can contribute up to $6,000 to your Roth IRA if you’re under 50. You are allowed an extra $1,000 contribution boost if you are age 50 or over. By contributing the max, you’ll have more money to invest in the assets of your choice.

Make sure you are qualified to contribute to a Roth IRA, or you will be subject to penalties. There is a phase-out range that allows you to make reduced contributions until your income tips over the scale.

But if your modified adjusted gross income (MAGI) isn’t a hurdle, you should try to contribute as much as your financial situation allows. If you need to handle other financial priorities before you boost your Roth IRA contributions, create a plan and make it happen. Here are some tips to help maximize your Roth IRA contribution power:

Eliminate unnecessary expenses. For example, stop holding onto subscriptions that aren’t getting you closer to your financial goals, especially if you barely use them.
Allocate bonuses to your Roth IRA. If you’ve met your short-term goals, it doesn’t hurt to spruce up your Roth IRA with your extra cash.
Break your annual contribution goal into monthly milestones. If your goal is to contribute $6,000 for the year, you can set aside $500 per month for 12 months to achieve your goal.

2. Are you investing the money in your Roth IRA?

Contributing money to your Roth IRA every year is a great goal to aim for, but it doesn’t stop there. If you want your money to grow, you have to invest it. This is one of the biggest mistakes I made early in my retirement-planning journey. I had no idea that I had to tell my money where to go in order for it to grow.

The investments you will have access to depend on the custodian you choose to house your assets. Traditional brokers may limit your investments to stocks, bonds, and mutual funds. A self-directed IRA can allow you to include more exotic options in your investment portfolio like cryptocurrency and real estate.

If you’re having trouble trying to figure out what to invest in, you should do your research and consider the following:

Goals
Risk tolerance
Retirement date
Industry knowledge
Financial needs
Potential rate of return
Time horizon

3. Are you taking advantage of the extended deadline to make contributions?

If you neglected your Roth IRA in the prior year, don’t beat yourself up. You still have time to make progress toward your retirement goals.

The IRS gives you extra time to make contributions to your Roth IRA every year. For example, you could have contributed to a 2021 Roth IRA at the beginning of 2022. If you’re working on your Roth IRA goals for 2022, you have until the tax filing deadline in April 2023 to make prior-year contributions. Let’s say you only contribute $3,000 to your Roth IRA for 2022. You can contribute $1,000 per month from January through March 2023 and still hit the annual maximum.

Allow these questions to lead you to action

After you’ve reviewed the three questions above, it’s time to take action. The rewards are found in the steps you take after you learn something new or discover a new way of thinking about something.

Start with one small action you plan to take right now, and hold yourself accountable. If you’ve already mastered the three questions above, then start asking more questions. Your diligence may lead you to the retirement of your dreams.

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