2 min

Why You Should Max Out Roth or Traditional IRA

Aug 25, 2022
in a nutshell
  • Once you’ve opened an IRA, you should invest your IRA contributions.
  • Make sure you understand the fees for and investments in your account.
  • Refrain from withdrawing money. It hurts your retirement prospects down the line.
Image of Here is why you should max out your Roth or Traditional IRA account. Plus a few tips to make the most of an IRA.
in a nutshell
  • Once you’ve opened an IRA, you should invest your IRA contributions.
  • Make sure you understand the fees for and investments in your account.
  • Refrain from withdrawing money. It hurts your retirement prospects down the line.

The road to a comfortable retirement can get easier if you make the most of an IRA.

Saving in an individual retirement account can be an easy and accessible way to prepare for your financial future, experts say, especially if you don’t have access to a workplace retirement plan. In 2020, about one-third of private industry workers didn’t, according to the Bureau of Labor Statistics.

The maximum amount you can save in 2022 is the same as the year prior: Investors can stash up to $6,000 in either a traditional or Roth IRA, according to an IRS announcement. Catch-up contributions for those 50 and older allow an extra $1,000, for a total of $7,000.

Though the max hasn’t changed, the IRS did increase income limits, meaning you could earn a bit more in 2022 and still contribute to a Roth IRA or claim a tax deduction on traditional IRA contributions.

How maxing out your IRA can pad your balance at retirement

It’s estimated that over time you could see an average annual growth of 5% to 10%, adjusted for inflation. Some experts say you can safely use 8%, which has been roughly the compound annual growth rate of the S&P 500 since 1980.

If you contribute the maximum $6,000 to your IRA this year and assume a hypothetical 6% annual growth, here’s how much that one year’s effort could add up to by age 65, depending on your age:

  • Age 25: $65,745

  • Age 30: $48,741

  • Age 35: $36,135

  • Age 40: $26,790

  • Age 45: $19,861

If you’re age 50 or older, catch-up contributions can also factor in. Assuming a hypothetical 6% annual growth, if you contribute the maximum $7,000 in 2022, here’s how much that one year’s effort could add to your retirement balance by age 65, depending on your age:

  • Age 50: $17,179

  • Age 55: $12,736

  • Age 60: $9,442

3 tips to make the most of an IRA

It may not be always easy to stick to a retirement saving plan. Getting started ASAP is key. Here are some tips from experts to make the most of your IRA:

Invest your IRA contributions

Once you’ve opened an IRA, the next step is picking your investments. Some accountholders forget and leave their contributions lingering in cash.

“Saving is step one but investing that money appropriately is the all-important second step,” says Bankrate chief analyst Greg McBride. If it fits in your plan, “favor broad-based, low-cost index funds, build a diversified portfolio and stick with this over time. Do not chase the hot investment of the day.”

Review investment and account fees

Make sure you understand the fees for and investments in your account. What seem like small differences in fees can, over decades, add up to tens of thousands of dollars.

“Fees are really important — they matter a lot in long-term investing,” Will Rhind, CEO of ETF firm GraniteShares, told Grow. “And cost is something that you can control. You can’t control the market or how the IRS is going to tax you, but you can control the fees that you pay.”

Stay invested through tough times

“Millennials and Gen Z tend to have significant money-intensive needs like student debt, paying mortgage, and starting a family,” says Carol Tompkins, a business development consultant at accounting software website Accounts Portal. But withdrawing money now hurts your retirement prospects down the line.

Instead, try to “build up emergency funds and live within your means to avoid having to make an early withdrawal,” she says.

All investments involve risk, including loss of principal. This information is for illustrative purposes only and shows hypothetical projections that assume an 6% fixed annual rate of return, with the noted contributions over the referenced time periods, exclusive of fees. A 6% annual return was selected as an arbitrary figure to show the potential impact of long-term investing and compound returns. The illustration is not intended to predict the investment performance of any security or index. Such results do not take into consideration economic or market factors which can impact performance. Actual investments results may be materially different from those portrayed. The strategies and investments discussed may not be suitable for all investors and should not be construed as investment advice. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions.

This material has been presented for informational and educational purposes only. The views expressed in the articles above are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses. Article contributors are not affiliated with Acorns Advisers, LLC. and do not provide investment advice to Acorns’ clients. Acorns is not engaged in rendering tax, legal or accounting advice. Please consult a qualified professional for this type of service.

Shawn M. Carter

Shawn M. Carter was a writer for Grow.

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