When it comes to retirement planning, structuring your IRA for growth is essential. It's not just about hitting those contribution limits; it's about creating a well-rounded strategy that includes understanding your cash flow, choosing the right investment vehicles, and planning for your future income streams. In this post, we’ll explore how to maximize your IRA's potential by discussing various fund types, contribution strategies, and the importance of considering your entire retirement picture. Get real about what these funds are and how to implement them within your budget!
What’s The IRA?!
Before I get into my focus on retirement planning within this post, let’s talk about what you typically see on social media or articles online when it comes to your IRA. An IRA or Individual Retirement Account can be broken down into two common paths: Regular/ Traditional or Roth. They both hold different tax advantages.
Traditional IRA: With a Traditional IRA, you can contribute pre-tax dollars, which means you may be able to deduct your contributions from your taxable income. This can lower your tax bill for the year you make the contribution. However, when you withdraw money in retirement, those distributions are taxed as ordinary income.
Roth IRA: A Roth IRA, on the other hand, is funded with after-tax dollars. This means you pay taxes on your contributions upfront, but qualified withdrawals in retirement are tax-free. This can be a huge advantage if you expect to be in a higher tax bracket when you retire.
Contribution Limits:
As of the current guidelines and likely future years, the annual contribution limit for IRAs is generally $6,500 for individuals under age 50. If you’re age 50 or older, you can contribute an additional $1,000 as a catch-up contribution, bringing your total to $7,500. It’s important to stay informed about these limits, as they may change slightly from year to year.
Traditional IRA:
Eligibility:
If you have earned income, you can contribute to a Traditional IRA. That includes your salary, wages, commissions, bonuses, or money from self-employment.
Contribution Limits:
For 2024, you can put in up to $7,000 if you're under 50. If you’re 50 or older, you get to add an extra $1,000 as a catch-up contribution.
For 2025, the numbers are mostly the same - Under age 50: You can contribute up to $8,000. Age 50 or older: You can contribute up to $9,000, which includes a $1,000 catch-up contribution.
More context can be found via our good friends of the IRS.
That breaks down to $135 on the week (depending on the year). If you can’t hit that, contribute up to what you can per your budget/expenses.
Deductibility*:
The deductibility of your contributions depends on your income and whether a workplace retirement plan covers you (or your spouse if married):
If covered by a workplace plan:
For single filers: The deduction begins to phase out at an adjusted gross income (AGI) of $73,000 and is completely phased out at $83,000.
For married couples filing jointly: The deduction phases out if your combined AGI is between $116,000 and $136,000.
If not covered by a workplace plan: You can deduct your entire contribution regardless of income.
Roth IRA:
Eligibility:
Similar to a Traditional IRA, anyone with earned income can contribute to a Roth IRA.
Contribution Limits:
The contribution limits for Roth IRAs are the same as those for Traditional IRAs: up to $7,000 if under 50, and $8,000 if 50 or older.
Income Limits:
Roth IRAs have specific income limits that determine whether you can contribute directly:
For single filers: You can contribute the full amount if your AGI is less than $138,000. The ability to contribute phases out between $138,000 and $153,000.
For married couples filing jointly: The contribution limit phases out if your combined AGI is between $218,000 and $228,000.
If your income exceeds these limits, you may need to explore strategies like a backdoor Roth IRA, which involves making a non-deductible contribution to a Traditional IRA and then converting it to a Roth IRA.
*"Deductibility" with an IRA means whether you can subtract your contributions from your taxable income, which could lower your tax bill. For traditional IRAs, whether your contributions are deductible depends on your income, tax filing status, and if you have a retirement plan at work. Roth IRAs, though, don’t offer a tax deduction upfront, but your money grows tax-free.
When it comes to AGI: AGI, or Adjusted Gross Income, is your total income for the year after subtracting certain adjustments, like student loan interest or retirement contributions. It’s the number the IRS uses to determine tax brackets, deductions, and credit eligibility. It’s your gross income minus specific deductions.
Understanding Your Cash And Carry:
I have this notion that I’ve been saying for the last couple of years when it comes to structuring your IRA: determine your cash and carry ratio. Ratios help you find the balance of a thing within a percentage. But when it comes to your retirement, your Cash and Carry is the key many people don’t discuss when building your retirement within an IRA. Cash and Carry is a strategy that refers to how you allocate your contributions and investments.
Cash: This is the amount you set aside each paycheck or month to contribute to your IRA. It’s essential to determine a realistic contribution amount based on your budget.
Carry: This refers to the investment strategy you choose for the funds in your IRA. The goal is to pull funds that will grow over time, ensuring your retirement savings are working as hard as possible for you.
So you need to know how much cash you want to have in your IRA and then what types of funds/investments will carry the growth of it. Did you know that 40% of people who contribute to an IRA (focusing on Roth), forget to buy or distribute funds? Wild times. But this breaks into the growth you could or would’ve seen within that account. You’re missing the gains, if you don’t invest a thing!
So, let’s shift to the types of investment you could use to stack your IRA!
Types Of Funds That Run Your IRA:
ETFs (Exchange-Traded Funds): ETFs are a great way to diversify your portfolio without high fees. They often track specific indices and can provide exposure to a broad market with lower expense ratios compared to mutual funds.
Low-Fee Index Funds: These funds also aim to replicate the performance of a specific index but are typically structured differently than ETFs. Low-fee index funds can be a cost-effective way to invest in various asset classes.
Target-Date Funds: Most people don’t talk about this portion of investing in an IRA. Yes, you could find that Target Data fund that your employer could have stacked up in your retirement. Even though you don’t have the match in these accounts, you can match the energy of those types of funds within your IRA. These funds automatically adjust the asset mix as the target date approaches (e.g., retirement). They can be a hands-off option for those unsure about where to start. Look for target-date funds outside of your employer's retirement plan to build your customized strategy. As anything, I will tell you to research not only the fees (some can be tricky) but also the performance of them. If they're trash, they are going to trash your growth for retirement.
Reviewing Your Retirement Collectively:
Your IRA should not be viewed in isolation. It’s crucial to assess your entire retirement landscape, including any employer-sponsored retirement plans like a 401(k). Here are some points to consider:
Old 401(k)s: If you have old 401(k)s from previous jobs, consider rolling them over into your IRA. This can simplify your financial life and give you a broader array of investment options. Here’s a platform to help you find and roll them over, and here’s a place for you to find them in general.
Securing Income Streams: Think about how your retirement accounts will work together to provide income in retirement. This could involve strategic withdrawals from your IRA, 401(k), and any other retirement savings you have.
Tax Planning Considerations:
Understanding the tax implications of your retirement savings is vital. Contributions to a traditional IRA may be tax-deductible, reducing your taxable income now, while distributions will be taxed as income in retirement. Conversely, Roth IRAs are funded with after-tax dollars, allowing for tax-free withdrawals in retirement.
Action Step: Consult with a tax advisor or planner to structure your retirement accounts in a way that aligns with your current and future tax situation.
Setting Contribution Limits + Financial Goals:
Understand Your Contribution Limits: Ensure you know the annual contribution limits for your IRA and any other retirement accounts. For 2024, the limit for IRAs is $7,000 for those under 50 and $8,000 for those 50 or older. So let’s reverse engineer that backwards – $7000/52 weeks: $135 per week. Now look at your budget to determine how much that fits along with your saving for your emergency fund or other savings goals based upon your financial plan. That $135 might not fit, so you have to determine which amount of contributions you could handle. I talk about this in this YouTube video.
Define Your Financial Goals: Set specific, measurable, achievable, relevant, and time-bound (SMART) goals related to your retirement savings. Consider how much you want to have saved by a certain age.
Determine Cash and Carry: Assess how much cash you can comfortably contribute each month and identify which funds you want to “carry” for growth. Consider utilizing fractional shares to invest in high-quality funds without needing a large initial investment.
Platforms I Recommend:
Most of them do the same thing, but you have to be mindful of the fees, structure, and platform benefits. But here are some of my favorite platforms to open and run your IRA:
Fidelity (their education/workshops are amazing)
Charles Schwab (solid platform)
Vanguard (OG platform)
So Now What?
Structuring your IRA for growth requires a comprehensive approach that considers not just contributions but also the types of investments you choose, the overall strategy for your retirement savings, and the tax implications involved. By understanding cash and carry, exploring various fund options, and integrating your old 401(k)s into your IRA strategy, you can set yourself up for a more secure financial future. Take the time to evaluate your retirement goals, and don’t hesitate to consult with financial and tax professionals to optimize your approach. But learning how to do stack your savings beyond what social media tells you to do. Even if you can’t contribute $135 per week, determine not only how much you can park within your IRA but also what funds will carry your account to grow it for gains. Do what the 60% do with these amazing accounts, not what the 40% do - invest and implement!
TL, DR (Too Long, Didn’t Read - Summary):
To keep up on how the IRA contribution limits as we go through the years, click here.
Traditional IRA: Anyone can contribute regardless of income, but tax deductibility is based on income and coverage by a workplace retirement plan.
Roth IRA: Contributions are limited based on income levels, and higher earners may need to look into alternative strategies. Most people focus on stacking in their Roth rather than the regular type of IRAs.
Don’t just contribute to your IRA, but also distribute and buy quality funds to give you amazing gains later.
Determine what your financial goals are and layer them into your retirement planning.
Find those old 401Ks and help them stack up your contributions for the year within your IRA.
Read my other retirement article here or reach out to me if you need to work with a financial planner on your goals.
Stay Funded, Friends.
