How Much To Put In Roth IRA Per Month?

A Roth IRA is a valuable resource for aspiring retirees. This retirement account lets you take tax-free distributions and not have to worry about capital gains taxes. Because you make post-tax contributions to your account, it grows tax-free. Contributing the maximum amount to your Roth IRA will help you grow your retirement account faster, but that may not be the right move for everyone. This guide will examine factors that impact how much you should put into your Roth IRA each month.

What Is a Roth IRA?  

A Roth IRA is a retirement account that grows tax-free. Investors do not get to defer any taxes but won’t have to worry about taxes on their distributions. Your Roth IRA eligibility depends on your modified adjusted gross Income (MAGI). This number must be less than $153,000 for the 2023 tax year if you are filing your taxes as a single person. Married couples filing their taxes jointly must have a combined MAFI below $228,000 to qualify for Roth IRAs. The IRS adjusts the MAGI cap every year.

How Does a Roth IRA Work? 

Roth IRA accounts help long-term investors save money on taxes. While you don’t get any upfront tax relief, the true benefit of a Roth IRA is not paying taxes on capital gains and dividends. Investors can only realize a return on the Roth IRA if their assets perform well. If assets stay flat or lose value, a traditional IRA would have been better. The younger you are and further away from retirement you are, the more sense a Roth IRA makes for your retirement planning.

Eligibility for a Roth IRA

Your eligibility for a Roth IRA depends on your monthly adjusted gross income and tax filing status. While the maximum amounts change every tax year, reporting high income that is below the maximum can still impact your contribution maximum. Once a single filer makes over $139,500 in modified adjusted gross income or a married couple filing jointly earns over $219,000 in modified adjusted gross income, their maximum contribution limit gradually decreases in a tiered system. The contribution limit gets progressively lower until it hits zero if your modified adjusted gross income surpasses the limit imposed by the IRS.

Just because you contributed to your Roth IRA doesn’t mean you can contribute to it next year. Monitoring your income will help you know whether you can contribute to your Roth IRA and what your limit is. Consumers who do not make a high enough modified adjusted gross income to trigger adjustments can contribute $6,500 per year before turning 50 and $7,500 per year if they are 50 or older. The IRS periodically raises Roth IRA contribution limits based on inflation and other factors.

Opening and Setting Up a Roth IRA Account 

Financial institutions and brokerage firms can walk you through the process of creating a Roth IRA. It’s important to review your choices and work with a reputable company. Applicants will have to provide a driver’s license, Social Security number, the account’s beneficiary and employer’s information if applicable. You will also need to link a bank account to fund your Roth IRA.

Investment Options for a Roth IRA 

Roth IRAs let you choose from many assets, such as stocks, bonds, mutual funds and exchange-traded funds (ETFs). Many possibilities exist within this selection, and it’s important to maintain a diversified portfolio in your Roth IRA. A diversified portfolio minimizes your risks, and you can adjust your portfolio based on changes to your risk tolerance and financial goals. 

Withdrawals from a Roth IRA

You can withdraw your contributions at any time without incurring penalties. The same rule does not apply to dividends and capital gains. These earnings must sit in your Roth IRA account until you turn 59½ years old before you can withdraw them penalty-free. You must have also held the Roth IRA plan for over five years to make penalty-free withdrawals. For instance, you may incur penalties if you withdraw your earnings before turning 59½. You may also pay penalties if you open a Roth IRA account at 58 and withdraw earnings when you turn 61.

Tax Considerations in a Roth IRA

You don’t have to worry about taxes when you withdraw funds from a Roth IRA. These distributions do not increase your taxable income, and you do not owe taxes on capital gains or dividends. You pay taxes when putting money into a Roth IRA and do not have to pay taxes when taking your money out of a Roth IRA.

Managing and Monitoring Your Roth IRA

A Roth IRA can compound your money in the background, but it’s still a good idea to check on your investments. The thesis for an investment can change over time, and you may want to adjust your portfolio based on changes to your risk tolerance and financial goals. Younger investors tend to invest in riskier growth assets, while older investors usually look for stable cash flow as they get closer to retirement. 

Roth IRA Contribution Limits for Financial Freedom

The IRS sets limits on how much investors can contribute to their Roth IRA plans. The 2023 limits are $6,500 per year for people who are younger than 50. A catch-up contribution of $1,000 gets added to the limit for consumers who are 50 or older. The IRS periodically adjusts the limit based on inflation and other factors.

Saving money and looking for ways to increase your income will help you reach the maximum contribution limit. Aiming for the maximum contribution limit each year allows your retirement account to grow faster. You don’t have to rely as much on high returns for a smooth retirement if you can consistently put $6,500 into your account each year. It’s even better if you can increase your annual contribution as the IRS raises its limit. Just make sure you do not exceed the maximum contribution limit, as that can result in additional penalties. If you are not sure, you should speak with a professional.

Tips for Incorporating Roth IRA Contributions Into Your Monthly Budget

Roth IRA contributions can make your retirement years easier and give you more choices later in life. Putting them into your budget can pay off in the long run, but it’s easier said than done. These tips will make it easier to incorporate Roth IRA contributions into your monthly budget.

Assessing Your Current Expenses and Income

Any budgeting plan starts with a comprehensive review of your income and expenses. Knowing these numbers and how to optimize them indicates how much money you can put into a Roth IRA. It’s important to address your living expenses and put some of your money in an emergency fund.

Prioritizing Roth IRA Contributions

A Roth IRA can be a great long-term investment for your financial future, and it’s important to give it prominence in your monthly budget. While living expenses get first priority, you can give Roth IRA contributions priority over discretionary spending. Creating financial goals that coincide with your Roth IRA contributions can help you maintain consistent contributions. An annual $6,500 contribution breaks down to $542 per month. Picking up a side hustle and trimming expenses can make Roth IRA contributions more feasible.

Creating a Realistic Budget

Budgeting gives you a snapshot of your income and expenses. It helps you prioritize what is important and make adjustments. While a budget can help, an unrealistic budget can discourage you when you put it to the test. A realistic budget gives you some room in case expenses go up, or there is an emergency. It also doesn’t force you to make uncomfortable sacrifices that negatively impact your quality of life. Setting aside money each month for your Roth IRA can help you get there sooner. 

You also can consider putting the money into a certificate of deposit (CD) first and then having extra interest that you can put into a Roth IRA. If you open a $6,000 CD at the start of the year at a 4% annual percentage yield (APY), you will end up with an extra $240 you can put into your Roth IRA at the end of the year. You should only consider this approach for low-risk investments like Treasury bills and CDs that expire before the Roth IRA contribution deadline.

Automating Contributions

Automating Roth IRA contributions allows you to grow your retirement funds without having to remember to transfer money each month. You can set up automatic contributions in your brokerage account and decide on the frequency. An automatic contribution also increases your commitment to your long-term retirement goals. You won’t be as tempted by a discretionary expense if you have automatic contributions enabled.

Making Sacrifices and Cutting Expenses

You can’t cut necessary living expenses, but you can take a closer look at your discretionary spending and unused subscriptions. Reducing your spending makes it easier to contribute to your Roth IRA and grow your retirement portfolio. Short-term sacrifices can lead to long-term gains. 

Tracking Your Progress and Adjusting as Needed

Your budget changes constantly as your income and expenses fluctuate. Monitoring your progress and your retirement funds will help you make the necessary adjustments to maximize your Roth IRA contributions. It’s also important to review your financial health and gauge whether you need to put extra money into an emergency fund and cover necessary living expenses. 

Grow Your Retirement Fund One Month at a Time

Making monthly contributions to your retirement account can help you reach the annual limit and grow your portfolio. A retirement account won’t help you too much now, but it can become critical when you no longer earn an annual salary. Ideally, the retirement account and other income streams can replace what you make at your full-time job and support a good lifestyle in retirement.

Frequently Asked Questions