As we enter the new year, we want to share some best practices for investors regarding their IRA.
Galleon suggests the following:
1 – Contribute the maximum amount. For the 2021 and 2022 tax years, investors under age 50 can invest up to $6,000 (or the lesser of taxable compensation) in their traditional and Roth IRAs. Many Galleon investors fail to maximize their investments, which can mean losing tens of thousands of dollars in savings over a 30-year period.
2 – Take advantage of “catch-up” contribution opportunities. For the 2021 and 2022 tax years, IRA owners aged 50 and older can contribute up to $1,000, for a total of up to $7,000 per person. Thus, a married couple over 50 who is eligible to contribute can contribute $14,000 jointly.
3 – The earlier you make your contribution, the better. Instead of making IRA contributions at the start of the tax year, many investors make their IRA contributions 15 months later, during the last two weeks before the tax filing deadline. However, investing early in the tax year means you appreciate the benefits of tax-deferred investing sooner. According to Stephen Kovach, Chief Investment Officer at Global Advisers, “by making your contribution early in the tax-year, vs later, your money compounds and grows sooner, which in turn results in potentially higher results over the long-term.”
Put differently, the cumulative effect of early contributions can make a big difference in the long run. For instance, assume that two investors, John and Mary, each contribute $6,000 per year to an IRA. John contributes on January 1 of each year, Mary on April 1 of the following year. Doing the math, John could end up with nearly $16,000 more than Mary over a long-term period simply because of previous (earlier) contributions. Kovach says, “if you ask someone who is retired if they would like to have an additional $16,000 today, right now, I’m certain everyone would respond with a resounding “yes”.
Note: this example is not intended to represent any return on any particular investment, and interest rates are not guaranteed.
4 – Convert your tax refunds into your IRA contributions.
According to Kovach, investors should consider using their tax refund for IRA contributions. Many people make the mistake of spending their IRS refunds on non-essential items but doing so makes things more difficult down the road. For investors who find it difficult to change their behavior and send the money into their IRA, IRS makes this easy by allowing them to send it directly to their IRA custodian at the time they file their tax returns.
By following these simple steps, you can position yourself for long-term retirement account success. Contact us at 1-844-GALLEON to speak to an advisor and get help setting up your plan.