Do These 3 Things To Maximize Your Roth IRA

Written By Mary Beth Eastman
Last updated October 22, 2018

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October 22, 2018

Simple. Thrifty. Living.

Investing in a Roth IRA lets you build wealth without paying taxes on your contributions. Millions of Americans have Roth IRAs to help them maintain their lifestyles during retirement. Unfortunately, many of those people don’t know how to maximize their Roth IRAs.

Follow these three tips to maximize your Roth IRA and meet your investment goals.

The government sets limits on how much money you can invest in your Roth IRA each year. If you don’t meet that limit, then you’re missing an opportunity to grow your wealth.

For 2018, people aged 50 and older can contribute up to $6,5000. If you’re under 50, then you can contribute $5,500.

The earlier you start investing in a Roth IRA, the more money you can earn. On average, you can expect to earn about 6% on your investment. The exact amount that you earn, however, depends on the investment options that you choose.

Regardless of how much interest you earn, investing early will help you make more money. Let’s say you open your Roth IRA when you’re 29 years old and you invest $5,500 until you retire at 65. Assuming that you pay a 25% marginal tax rate when you withdraw money from the account, your Roth IRA will reach a value of almost $700,00.

If you don’t open your account until you turn 40, your Roth IRA will only accumulate a value of about $319,000. You lose more than $350,000 by waiting 11 years to start investing.

Once you reach 59.5 years old, you don’t pay any penalties when you withdraw money from your Roth IRA. (You do, however, have to pay taxes on the money you withdraw.) If you’re under 59.5 years old, though, you will pay a 10% penalty on the money you take out of your Roth IRA account.

If paying a 10% penalty isn’t enough to stop you from withdrawing money, consider that you will also lose interest by taking money out early. Once you take money out of the account, those dollars will never have an opportunity to earn more interest. That could cost you thousands of dollars on top of the penalty.

A Roth IRA can make it much easier for you to retire without cutting your expenses significantly. Take advantage of your Roth IRA donations so you can get the biggest returns possible. The top online investment companies can help you manage your accounts.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

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