Maxing out your IRA is generally seen as a wise financial move — and a huge accomplishment if you’re able to pull it off. But that doesn’t make it the best decision for everyone.
Believe it or not, there are times when you might be better off not contributing anything to your IRA. We’ll look at some of the pros and cons of maxing out your IRA to help you decide if you want to put more money in your account before the end of the year.
Pros of maxing out your IRA
You’re allowed to contribute up to $6,000 to an IRA in 2022, or $7,000 if you’re 50 or older. But those figures mask the true value of those contributions. They’re most likely going to be invested for years — possibly even decades — before you withdraw them. If your investments do well, your nest egg will grow considerably over time, setting you up for a more comfortable retirement.
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A single $6,000 IRA contribution will be worth nearly $28,000 after 20 years with an 8% average annual rate of return. After 30 years, it’ll be worth over $60,000. That might be enough to cover a year or two of retirement expenses when paired with Social Security or a pension.
Stashing money in an IRA also enables you to choose when you want to pay taxes on your funds. A traditional IRA is best if you want a tax break this year, but you have to be comfortable paying taxes on your contributions and earnings in retirement. Or you could go with a Roth IRA if you want tax-free withdrawals in retirement, but then you’ll pay taxes on your contributions upfront.
Cons of maxing out your IRA
Maxing out your IRA usually means tying up your savings for years. With few exceptions, you’ll pay a 10% early withdrawal penalty if you’re under 59 1/2. And if it’s a traditional IRA, you’ll pay taxes on your withdrawals too.
So it’s not a good idea to put money that you plan to use in the near future in an IRA. Keep these funds in a savings account or somewhere you can access it penalty free at any time.
What if you change your mind?
It’s best to think carefully about how much you’d like to contribute to an IRA before you actually do it. If you put money into the account and regret it, you’ll trigger a penalty if you withdraw it.
But if you choose not to make a 2022 IRA contribution and you later regret that, you may be able to fix it. IRAs enable you to make prior-year contributions up until the tax deadline. That’s April 18, 2023, for the 2022 tax year. But some IRA providers may automatically assume that any contributions you make in 2023 are for the 2023 tax year, so you may want to reach out to the company to verify that it applied the contribution to the correct year.
You’re the only one who can decide if maxing out your IRA is a smart move for you right now. If you don’t want to, you could always contribute a little less to your account. Or you could start planning for your 2023 contributions. Just make sure you understand the near- and long-term implications of your decision.
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