Let’s go over how long you can contribute to a Roth IRA, what the annual deadlines are for a contribution, and how to maximize your contributions throughout your life.
How Long You Can Contribute to a Roth IRA
There is no age limit to Roth IRA contributions as long as you have taxable compensation. The IRS limits Roth contributions to those who have $140,000 or less of annual taxable compensation or $208,000 for married couples filing jointly. Contributions for a traditional IRA also have no age restrictions, as of 2020. For 2019, you could not make contributions to a traditional IRA if you were over 70½. Taxable compensation is defined by the IRS as: “wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. It also includes commissions, self-employment income, nontaxable combat pay, military differential pay, and taxable alimony and separate maintenance payments.” Unfortunately, income from Social Security, dividends, and other investments doesn’t count. If you have retired and wish to continue funding a Roth, it may make sense to take on a part-time or consulting position to earn at least $7,000 for the year, which is the contribution limit for those over 50 years old. That way, you can make the Roth IRA contribution.
Contribution Rules for Spousal Roth IRAs
The exception to the taxable compensation rule is if your spouse is still earning enough to cover the $7,000 contribution limit. With a spousal Roth IRA, the IRS allows people who earn less than their spouse to contribute the maximum they would be allowed using the joint income reported on the tax return. Let’s say you are retired and make no income, but your spouse is still working part-time making $25,000 per year. You’re both over 50, so your maximum annual contributions would be a total of $14,000. If your spouse makes a $7,000 contribution to their IRA, you would calculate the amount that you can contribute by deducting that contribution amount from the joint income. In this case, $25,000 - $7,000 = $18,000 is greater than your limit of $7,000, so you’d be able to make the full contribution.
Annual Contribution Deadlines
The annual contribution deadline is the day your taxes are due the next year. For example, if you want to contribute to a Roth IRA in 2022, you must do so by April 15, 2023.
Maximizing Lifetime Contributions to a Roth IRA
The first step is to invest the maximum amount each year. If you invest $6,000 per year for 30 years with an 8% annual return, your savings will have grown to over $740,000. This is the power of compound interest. The earlier you start to invest, the more time your initial investment has to earn interest, and that interest also earns interest, and so on. If you can save $6,000 a year through frugal living, the next step is to choose investments that will offer returns without a large amount of risk. Many investors recommend starting out with index funds, such as the S&P 500. This will spread your investment over a large number of stocks to increase diversity and reduce risk. Finally, as you near retirement, start to think about changing your investment strategy. You can:
Increase your annual contribution to $7,000 Roll over 401(k) plans from jobs you no longer have to consolidate funds Consider using different asset allocation strategies to reduce risk
Diversifying across stocks reduces your risk to a point, but you will still have market risk. Consider adding more diversity with other types of investments like fixed income and real estate to further reduce risk.
