Working Toward Retirement Goals? Consider the Max IRA Contribution

One of the best ways to save for the future is to use a tax-advantaged retirement account. With an Individual Retirement Account (IRA), you can direct how the assets are invested, and you have some flexibility around your contributions—how much and when.

But to make the most of your IRA, it can be a good idea to consider putting in the max IRA contribution, to help your retirement savings have the most impact.

What’s the Max Contribution? IRA and Roth IRA

"Though there are several types of IRAs, they fall into two basic structures—traditional and Roth," says Dara Luber, senior manager of retirement at TD Ameritrade. “Which one you choose, and how you maximize your dollars, depends on the tax treatment you want.”

With a traditional IRA, your contributions go in before tax (tax-deferred) and you pay federal income taxes down the road, when you withdraw the money. The Roth IRA, on the other hand, makes use of after-tax contributions. So even though you don’t receive a tax benefit today, the money can grow tax-free and you don’t have to pay federal income taxes when you withdraw funds from your account during retirement.

“If you think your taxes will be higher in the future, a Roth can help by allowing you to pay taxes at a lower rate today, while avoiding federal income taxes later,” says Luber. If you’d like help deciding what type of IRA is right for you, use the TD Ameritrade IRA Selection Tool. And speak with your tax advisor.

The maximum Roth IRA contribution and maximum IRA contribution are each the same: a total of $5,500 for 2018. For the 2019 tax year, the contribution limit rises to $6,000. Plus, if you’re at least 50 years old, you can make a “catch-up” contribution of another $1,000. The catch-up contribution limit is the same for both the 2018 and 2019 tax years.

Maximizing IRA Contributions for Current Tax Benefits

“If you decide your situation is better served by getting a tax deduction today, there are ways to use the max IRA contribution to your benefit,” says Luber.

Luber points out that it’s possible to contribute to your IRA all the way until Tax Day. So, if you get to the end of the year and you haven’t maxed out an IRA, you still have time to do so. If you don’t have a traditional IRA and are looking to reduce your taxable income, an IRA can be a tool to help.

“Not only can you contribute to an IRA up until Tax Day, but you can even open an IRA in 2019—up until Tax Day—and make 2018 contributions,” says Luber. “You can also open one for your non-working spouse and make spousal contributions.”

If you’re married, that could result in a tax deduction of up to $11,000 for 2018, and $12,000 for 2019. (Or if you and your spouse are at least 50, you each get an extra $1,000 deduction when you make the “catch-up” contributions, so the tax deduction could be $13,000 for 2018 and $14,000 for 2019.) But be aware: The IRS phases out the tax deduction when you or your spouse has a retirement plan at work and you reach a certain income level.

With a Roth IRA, you don’t get a tax deduction today, but if your taxes are low right now, you may not even need the deduction. “Sometimes being able to withdraw money tax-free can be a greater benefit,” says Luber. “Just be aware that there are income limits that come with contributing to a Roth. Once your income reaches a certain level, you’re not allowed to contribute.”

What about SEP and SIMPLE IRAs?

For the self-employed, it’s possible to take advantage of the higher contribution limits offered by SEP and SIMPLE IRAs, says Luber. “As long as you treat any employees the same way as you treat your own contributions, you can put more away for retirement and get tax benefits,” she says.

With a SEP IRA, the employer makes contributions to employee accounts. For the 2018 tax year, you can contribute up to 25 percent of your income or $55,000, whichever amount is lower. The contribution limit rises to $56,000 for 2019.

For a SIMPLE IRA, the employee can contribute as well. For 2018, you can contribute up to $12,500 with a $3,000 “catch-up” contribution for employees age 50 and over, and the employer can match up to 3% of income. For the 2019 tax year, the amount rises $500 to $13,000 ($16,000 including catch-up contributions for those who qualify).

Both SEP and SIMPLE IRAs are funded with pre-tax money, offering the chance for a potentially bigger tax deduction—lowering tax liability. And, as with traditional or Roth IRAs, it’s possible to make previous-year contributions through Tax Day.

Getting the Most Out of Any IRA

To attempt to get the best results from any IRA, Luber points out, it can be a good idea to start early and save often, and work toward maxing out your contributions for the year.

“Your best bet can be to set it and forget it,” Luber says. “Set up automatic transfers from your bank account to your IRA so you’re working towards building wealth without having to think about it.”

She also suggests looking into setting up an IRA even if you work for a big company that provides a 401(k). “You could maybe save more with a side gig,” Luber says. “An IRA can potentially boost your savings.”

Maximum contribution limits cannot be exceeded. Contribution limits provided are based on federal law as stated in the Internal Revenue Code. Applicable state law may be different. TD Ameritrade does not provide legal or tax advice. Please consult your legal or tax advisor before contributing to your IRA.