3 Roth IRA Mistakes You Don’t Want To Make In 2022 | Smart Switch: Personal Finance

(Charlene Rhinehart, CPA)

Retirement planning isn’t the most glamorous thing in the world, but it’s a surefire way to keep your lifestyle going well into your golden years. If you have a Roth IRA (individual retirement account), it’s important to make the most of it while you’re eligible to do so. You don’t want to reach retirement age and be left with empty savings.

If you’re trying to live your best life in retirement, here are three moves you should try to avoid in 2022.

Image source: Getty Images.

1. Skipping contributions

Although it’s tempting to ignore retirement contributions, it could come back to haunt you later. You will not be able to make direct contributions to a Roth IRA when your income exceeds threshold.

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For 2022, you can contribute up to $6,000 if you’re under age 50, but you can’t contribute more than your earnings for the year. The IRS increases your contribution limit to $7,000 when you turn 50. You can maximize your Roth IRA by setting up recurring transfers of $500 over 12 months if you’re under 50.

Although it brings the maximum amount to a retirement account it is something to aspire to, it is not mandatory. You want to contribute as much as you can based on your financial situation and goals. So if you can’t reach $6,000 this year, set a goal to save a smaller amount, say $1,200. You can set aside $100 a month or about $25 a week to accomplish that goal.

2. Not investing the funds you contribute

Getting your Roth IRA contributions into your account is one thing. Using the money in your account to its fullest potential is another. You can’t harness the full power of the Roth IRA unless you invest the money.

This is one Roth IRA error I did early on my Roth IRA trip, and it left me with pennies in my account after years of contributions. When you open a brokerage account, it’s important to ask about the type of assets you’ll be able to invest in. The majority online brokerage firms allows you to invest in traditional assets such as stocks, captivityand exchange traded funds. If you want more flexibility, you can check out a Self-Directed Roth IRA and get alternative investments like real estate or cryptocurrency.

Investing your money is key to boosting your portfolio. If you set aside $6,000 in a Roth IRA over 40 years, your account balance would be around $240,000. However, if you invest the funds, you have the potential to accelerate your path to a $1 million Roth IRA.

  • Years: twenty-one
  • Annual contribution: $6,000
  • Investment rate of return: 10%

These numbers could land you a million dollar Roth IRA at age 52. You only have to keep the money in the account until you turn 59½, unless you take advantage of a qualified distribution. Be sure to follow the rules to avoid taxes and penalties.

3. Withdraw all your money before retirement

The Roth IRA is a unique retirement account because you can avoid penalties and taxes if you need to withdraw the money you’ve contributed.

Let’s say you’ve contributed $15,000 over the last three years and your account value has increased to $18,000. You shouldn’t have a problem withdrawing $6,000 because you’ve contributed that much to your account over the years. However, if you go too far and take advantage of any winnings in your account, you will incur taxes and penalties if you are not a qualified distribution.

Don’t get too comfortable and start withdrawing all the money from your account. The Roth IRA is intended for retirement. It’s important to have another account for emergencies so you won’t be tempted to dip into your Roth IRA.

Don’t lose your Roth IRA benefits

The Roth IRA is one of the most sought after retirement accounts in the United States. Prepares you for tax-free income in retirement. You can pay your tax bill now and get tax-free benefits later. However, if you skip contributions, don’t invest your money, or withdraw all of your funds, you’ll never be able to enjoy the full power of the Roth IRA. By avoiding these Roth IRA mistakes, your future self can reap the benefits of a massive retirement portfolio that funds your lifestyle.

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