The tax-exempt Roth IRA is a very effective retirement planning vehicle, and it is best you take advantage of it. How do you max out your Roth IRA for both 2021 and 2022, even if you start after the new year?
If you earn under $125,000 as a single individual or $198,000 as a married couple then you fall within the threshold of income limits to directly contribute to the Roth IRA in 2021 up to a contribution limit of $6000 if you’re below age 50 and $70,000 if you’re 50 years or older.
After contributing, you can take advantage of tax-free compound growth, which will be available to you penalty-free in retirement — so long as you’ve had the account open for at least five years.
The IRS allows you to retroactively contribute to your Roth IRA for a given tax year as long as you do it by April 15 of the following year.
If you do decide to max out your Roth IRA on Jan. 1, 2022, be sure that your 2021 allotment is filled up; that is, make sure you’ve contributed up to your full 2021 limit before you attack contributions for 2022. This assures you’re making the most of the limited space that you have.
After you have contributed the maximum for the 2021 tax year, the next step is to look to maximize your 2022 Roth contributions. Ideally, someone who didn’t contribute to their Roth IRA in 2021 is to do both on Jan.
1st: Add the maximum allowed for 2021 first, and then add the maximum allowed for 2022 shortly after. For those under 50, this amounts to a total contribution of $12,000 ($14,000 for those over 50).
Doing this early makes your money have more time to compound in a tax-free manner; the effect is amplified because Roth space is uniquely valuable, and there isn’t much space, to begin with. So it’s smart to take advantage of everything you can, while you still can.
Your Roth contributions can be withdrawn at any time, both tax- and penalty-free. If you’re under 59.5 and you tap Roth IRA money before five years have elapsed since account opening, you’ll have to pay taxes and penalties on the earnings portion of your withdrawal.
Experts generally advise that you open your Roth IRA as early as possible and do not withdraw anything from it until you’ve reached age 59.5.