Three Ways to Make Your IRA Work Harder

Written by Nickel - 9 Comments

Here are a few tips from TIAA-CREF for making the most of your IRA:

1. Start making contributions as early in 2007 as you can. Don’t wait until next April to start thinking about your 2007 IRA contributions. Making small, consistent contributions at regular intervals throughout the year makes it easier on the household budget. As you plan your budget, keep in mind that withdrawals of IRA earnings before age 59½ are subject to ordinary income tax and a federal 10% penalty may apply.

2. Contribute the maximum if you can. The only way to reap the full benefit of your IRA is to consistently contribute the maximum every year ($4,000 in 2007 to a Traditional or Roth IRA; $5,000 a year if you’re age 50 or more) — or as close to the maximum if you can. Even putting in just a few extra dollars every year can potentially make a difference over time, thanks to the power of tax-deferred compounding.

3. Pay yourself first. If you’re serious about saving more money over the long term, then think about arranging for your IRA contributions to come automatically out of your checking or other banking account through regular electronic funds transfers (EFTs). You can change your contribution amount — up or down — any time.

This is all very sound advice… Starting early and planning ahead makes it all the more easy to maximize your contributions. Paying yourself first via automatic transfers is also a great habit to get into.

Published on May 2nd, 2007 - 9 Comments
Filed under: Saving & Investing, Taxes
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About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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Comments (scroll down to add your own):

  1. I’d love to make Roth contributions, but our income borders on the limit and may go over this year–what if you contribute and then your income goes over the limit? Does anyone know what happens?

    Comment by Nicole — May 2nd 2007 @ 11:04 am

  2. I am currently contributing an amount every couple of weeks that will get me to half of the limit, with an equal amount going to the emergency fund. I figure later in the year I will see if the index I invest in takes a dive again and then put a fair amount in at that point to buy at a discount; if not I will just make a slightly larger contribution towards the end of the year to get me at or near the max. I contributed the max last year.

    Comment by Blaine Moore — May 2nd 2007 @ 11:18 am

  3. I would add to this list to simply take advantage of your employer plans! A lot of company’s have pretty decent contribution plans for 401ks and the like.

    I was talking to my roommate yesterday about this, who works for Phillip Morris. They will contribute 15% of his total income each year after 2 years of working there. If he maximizes his contributions as well, you have a fantastic situation.

    I’d be willing to bet most people simply neglect taking the time to understand the plans their bosses have in place.

    Comment by Blain Reinkensmeyer — May 2nd 2007 @ 11:30 am

  4. Yes, good advice. But also remember the order of saving: 401ks to get full match, then Roth IRA, then rest of 401k to max out.

    Comment by FMF — May 2nd 2007 @ 1:03 pm

  5. I always hear the idea of maxing out the 401k first, and then the IRA, but dropping $15k just doesn’t seem feasible. $4k into the IRA does, though.

    Comment by junger — May 2nd 2007 @ 10:07 pm

  6. I was just going to write, and see Nicole posted the question I was going to effectively answer. I think this advice makes great sense if you’ll definitely be under the income threshold. But if not, you’re better of waiting. If you exceed the income threshold you need to go through the hassle of taking the proper amount of money back out and there can be a ton of negative tax implications. Better to wait in this case.

    Comment by Kim — May 2nd 2007 @ 10:35 pm

  7. Valuable points if people have money to contribute… many dont, they live above their means.

    Comment by Creditnine.com — May 3rd 2007 @ 1:35 pm

  8. Over the Roth limit – you can choose to leave the money in the account and allocate those dollars for future year contributions – ok if you have an unplanned income increase or your income limit will change due to change in filing status or spouse exiting the workforce. If those aren’t likely, then you’ll need to measure your income and contirbutions carefully.

    Comment by JOATMON — May 3rd 2007 @ 10:34 pm

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