5 Steps to Maximizing Your IRA Contributions in 2024

Investing using an Individual Retirement Account (IRA) can help you become a wealthier retiree. IRAs are great because you can open an account with a brokerage firm and typically have more investment choices than putting money into a 401(k). Additionally, if you choose a Traditional IRA, you can claim a tax deduction in the year you make the contribution, and if you choose a Roth IRA, you can make tax-free withdrawals (but you won’t be able to take the advance deduction if you use that option).

In 2024, the amount you can contribute to these tax-advantaged accounts has increased. In 2023, you can contribute up to $6,500, but in 2024, you can contribute up to $7,000 to your IRA account. If you’re 50 or older, you can also earn an additional $1,000 in catch-up savings.

If you want to make the most of these accounts, follow a few simple steps to get the most out of your IRA.

1. First, make sure you get a 401(k) match.

IRAs offer benefits over 401(k)s, including flexibility in investment options, but before converting your retirement account contributions to an IRA, it’s a good idea to invest enough money in your 401(k) to make sure it matches your employer.

Employer matches are free, but you must contribute to your account to get them. Your employer will match 100% of your contributions up to 4% of your salary, and if you make $45,000 a year, you can get up to $1,800 for free, as long as you invest that amount in a workplace plan. Don’t overlook it. To get the match, put money into your 401(k) first.

2. Choose the right type of IRA

If you’ve made 401(k) matching contributions and want to invest in an IRA but don’t have an account opened yet, you’ll need to decide which account type is right for you. The $7,000 contribution limit applies to both Roth and traditional IRAs. That amount of money can be invested globally. both You can split the money any way you want.

A Roth IRA may be a better choice if you think your tax rate will be higher in the future because it allows for tax-free withdrawals as a retiree, providing a tax break later in life. Traditional IRAs offer a tax break in the year you contribute, but you pay taxes as a retiree when you withdraw. So if you think you’ll be in a lower tax bracket as a retiree, this is a good option.

Most brokerage firms allow you to open both types of accounts, so which one you choose is a matter of personal preference.

3. Decide how much you want to donate each month.

Next, you need to decide how much you want to donate each month. It’s easiest to break your big goal of donating $7,000 (or $8,000) into monthly goals. So, if you qualify for catch-up contributions, you could invest $583.33 per month or $666.67 per month.

This may not apply to everyone. For example, you could deposit your tax refund into an IRA and then start investing in your IRA by investing a small amount each month. The important thing is to set a specific goal for when the money will be spent.

4. Automate contributions

After deciding how much to contribute and when, the next step is to automate the process. Arrange to have funds withdrawn directly from your checking account. So, if you plan to contribute $583 each month, you can automatically transfer the entire amount from your bank to your brokerage on payday, or split it up and transfer $291.50 each payday.

Automating your contributions can help you achieve your goal of maximizing your IRA without missing a beat.

5. Don’t forget to choose your investments

Finally, once money is in your IRA, you generally need to invest it (except in limited cases, such as when using a robo-advisor). So don’t forget to log in to your account and choose what you want to do with your money. For many people, the simplest option is to set up automatic purchases of S&P 500 ETFs. The S&P 500 tracks market performance and consistently delivers an average annual return of about 10% over time.

By following these five steps, you can make the most of your IRA contributions and prepare for a more secure retirement.

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