Grow your nest egg.
Saving in an individual retirement account can significantly reduce your tax bill and help your retirement funds grow faster without the drag of taxes. But you need to pay careful attention to the rules to meet deadlines and avoid penalties and fees. Here’s how to make optimum use of your IRA.
Contribute the maximum.
Workers ages 49 and younger can contribute up to $5,500 to an IRA in 2015. The rewards of consistently saving this amount can be huge. If you contribute $5,500 to an IRA each year between 35 and 65 and earn 7 percent annual returns you will have half a million dollars when you retire.
Make catch-up contributions.
Workers ages 50 and older can contribute up to $6,500 to an IRA in 2015, $1,000 more than younger workers. Saving $6,500 per year between ages 50 and 65 and earning a 7 percent annual return will boost your nest egg by about $175,000.
Meet the deadline.
IRA contributions are typically due by April 15 each year, which is a different deadline than most 401(k) plans. Making a March or April IRA deposit can result in nearly immediate savings on your current tax bill.
Claim a tax break.
You can defer paying income tax on the amount you deposit in an IRA. Income tax won’t be due on that money until it is withdrawn from the account. A worker in the 25 percent tax bracket who contributes $5,500 to an IRA will reduce his tax bill by $1,375.
Consider a Roth IRA.
Roth IRAs don’t get you a tax deduction in the year you make the contribution, but no income tax will be due on the earnings that accumulate in the account. Roth IRA withdrawals made in retirement from accounts that are at least 5 years old will be tax-free.
Get the saver’s credit.
If your income is below $30,500 for individuals and $61,000 for couples, an IRA contribution can additionally qualify you for the saver’s credit. This tax credit is worth between 10 and 50 percent of the amount contributed to a retirement account up to $2,000 for individuals and $4,000 for couples.
Save your tax refund.
Your income tax refund can be directly deposited in an IRA. With IRS Form 8888, you can split your tax refund between several accounts, including an IRA.
Set up direct deposits.
Setting up a direct deposit from your checking account to an IRA each month can ensure you don’t forget to save. To max out an IRA, your direct deposit would need to be $458 monthly if you are under age 50 and $542 per month if you are age 50 or older.
Avoid early withdrawals.
Withdrawing money from a traditional IRA before age 59 ½ typically results in a 10 percent early withdrawal penalty. However, there are several exceptions to the penalty, including if the money is used for college, large medical bills, health insurance after a layoff or a first home purchase.
Remember required minimum distributions.
Annual withdrawals from traditional IRAs are required after age 70 ½. The penalty for missing a distribution or withdrawing the incorrect amount is 50 percent of the amount that should have been withdrawn. However, Roth IRAs don’t require annual distributions in retirement.
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10 Steps to Max Out Your IRA originally appeared on usnews.com
