How Much Should You Put Into A Roth IRA Per Month - SmartAsset (2024)

Putting money aside regularly is one of the safest ways to save for retirement – ​​especially if you benefit from tax savings over time. Although some retirement accounts are tax-deferred, a Roth IRA is a popular tax-deferred option.

But to get the most out of a Roth IRA, you need to know how it works and what the maximum contribution limits are. One simple strategy in particular can help you maximize your savings.

A financial advisor can help you evaluate the performance of your retirement plan and help you choose investments that meet your financial goals.Find a qualified advisor today.

How Does a Roth IRA Work?

INRoth IRAis an individual retirement account that allows you to withdraw money tax-free in retirement.

Roth IRAs are funded with after-tax dollars. In atraditional IRA,you fund the account with pre-tax money and pay income taxes when it's time to withdraw. In the case of a Roth IRA, you fund the account with after-tax money and pay no tax on retirement principal or interest as long as you have held the account for at least five years.

Roth IRAs are generally considered more flexible than traditional IRAs. For example, some early withdrawals may be allowed tax-free if you have met both the five-year rule and the specific requirements for a qualified distribution. Otherwise, your payout may be subject to taxes and penalties. You also don't have to withdraw from your Roth IRA as long as you're alive if you don't want to, making Roth IRAs quite valuable estate planning tools.

What are the Roth IRA contribution limits?

The IRS limits Roth-IRA contributions by income level, so if you're married and filing jointly, your combined income can't exceed $214,000 if you want to contribute. You can contribute tomaximum limitif you earn less than $204,000, but as your income increases, the amount you can contribute is phased out.

For 2022, the maximum total contribution you can make to all of your IRAs, traditional or Roth, cannot exceed $6,000 per year. If you are age 50 or older, the IRS will allow you an additional catch-up contribution of $1,000, bringing your total to $7,000 for the year.

While this may not sound like much if you assume a 7% return, the $6,000 invested annually over 30 years could add up to $612,438. You contributed a total of $180,000 and earned $426,438 in interest.

How Much Should You Put Into a Roth IRA Per Month?

Because Roth IRA contributions are limited by income, many people often wait until they have paid their taxes to contribute. While money saved for retirement is positive, financial experts don't really recommend this method of maximizing your savings.

A better method is to follow onethe dollar cost averageapproximation. If you only contribute to your Roth IRA once a year, you may be investing your money during a high or low point in the market, which may prevent you from earning the maximum amount over time. With dollar cost averaging you don't time the market. Instead, you invest a certain amount on a regular basis, evenly throughout the year. This allows you to earn interest all year round and compensates for ups and downs, giving you more value for your money.

Because the maximum annual contribution amount for a Roth IRA is $6,000, following a dollar-cost averaging approach means that you will therefore contribute $500 per month to your IRA. If you're 50 or older, your $7,000 limit works out to $583 per month.

If you invest $6,000 once a year with an average return of 7%, you could have $612,438 in your IRA after 30 years. On the other hand, if you invest $500 per month, you could get $658,684. That's an estimated increase of almost $40,000 just from a monthly contribution instead of an annual contribution.

In short

In 2022, the maximum amount you can contribute to a Roth IRA is $6,000. Because you benefit most from tax-free growth by letting your money earn interest over time, donating $500 to your Roth IRA monthly instead of once a year means you can save an estimated $40,000 more over your lifetime to deserve.

However, saving for retirement can be complicated, and which retirement plans and accounts work best depends on your situation. It may help to talk to an advisor who can help you decide how much to spend and how to allocate your savings based on your specific circ*mstances. Always make sure you research and understand the benefits of each type of retirement account to maximize your savings.

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