Why You Should (and Shouldn't) Max Out Your Roth IRA

Your other financial goals might take priority

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A Roth IRA is a retirement savings account to which you can contribute post-tax dollars. Your earnings grow tax-free, and, in general, you won’t have to pay taxes or penalties on withdrawals after age 59 ½. 

The IRS sets an annual limit on Roth IRA contributions of $6,000 (or $7,000 if you’re 50 or older). Maxing out your Roth IRA every year can help you build up a sizable nest egg, but it might not need to be your top financial priority.

Key Takeaways

  • Maxing out your Roth IRA can help you make the most of this retirement savings vehicle, but it might not make sense if you have competing financial priorities. 
  • Some experts advise saving up an emergency fund, paying off high-interest debt, and max out an employer’s 401(k) match before maxing out your Roth IRA. 
  • The tax advantages of a Roth IRA can be beneficial if you expect to be in a higher tax bracket in the future than you are now, whereas a traditional IRA might be preferable if you expect your tax rate to go down. 

Should You Max Out Your Roth IRA Contributions?

Whether or not you should max out your Roth IRA contributions depends on your individual situation.

In 2022, the maximum annual contribution you can make for a Roth IRA is $6,000, depending on your filing status and modified adjusted gross income (MAGI). You can contribute an additional $1,000 in catch-up contributions if you’re age 50 or over In general, single and head of household filers with a MAGI of less than $129,000, and married filing jointly filers with a MAGI of less than $204,000 can make the maximum annual contribution. Filers with MAGIs over those amounts will have reduced contributions, or may not be allowed to contribute at all.

Who Should Maximize Roth IRA Contributions?

Since you contribute post-tax dollars to a Roth IRA, your withdrawals are tax-free. This setup can be beneficial if you expect your tax rate to increase in the future. 

“If a person believes his or her income tax rates will be higher in retirement than they are today, then it does indeed make sense to max out contributions on a Roth IRA today,” said Doug Carey, chartered financial analyst (CFA) and the president and owner of retirement and financial planning software WealthTrace. 

This might apply to you if you’re a younger investor at an early stage in your career and you expect to make more money in the future. For example, if your tax rate hovers around 10% right now but when you’re older, your tax rate is 20%, it makes much more sense to pay a 10% tax rate now on your contributions rather than 20% when you take your qualified distributions later.

You can max out your Roth IRA by contributing throughout the year in an approach known as "dollar-cost averaging," or you can contribute the maximum all at once in what’s known as lump-sum investing. There are mixed opinions about which approach offers better returns, but either way, you should reap the rewards of investing for your future.

Finally, you might appreciate the fact that you can access your Roth IRA contributions at any time without penalty, a useful feature if you find yourself needing access to cash.

That said, draining your retirement account could mean you miss out on valuable returns, so think carefully before you remove your contributions from your retirement account.  

Who Shouldn’t Maximize Roth IRA Contributions?

While Roth IRAs may offer tax relief to individuals who expect their tax rate to increase in the future, maxing out your account might not make sense if you predict that your tax rate will go down. 

If that’s the case, Carey said, “it makes sense to get the tax break today from contributing to a retirement account that is pre-tax rather than after-tax.”

A pre-tax account could be a traditional IRA or traditional employer-sponsored 401(k), for example. Note that some employers offer Roth 401(k)s, so it’s worth checking the details of your plan. 

It also might not make sense to max out your Roth IRA if you have other financial priorities, such as building an emergency fund

“Before contributing to a Roth IRA, you should make sure you have sufficient emergency savings in place,” said Joe Calvetti, CPA and the founder of Still River Financial Planning. “Typically three to six months of living expenses is a good rule of thumb.”

Some other priorities that might take precedence include paying off debt, maxing out an employer’s 401(k) match, and saving for college. 

“Having sufficient cash reserves, contributing to employer retirement plans, and paying down high-interest debt should all be financial priorities,” said Autumn Lax, CFP, AIF, and lead advisor at Drucker Wealth. 

Plans such 401(k)s  often include an employer match, which means the employer matches the contributions you make to your 401(k) up to a certain percentage. Roth IRAs, on the other hand, don’t typically have an employer match.

Unless you can easily contribute $6,000 to max out your Roth IRA, you might be better off contributing what you can afford now and catching up later. 

Pros and Cons of Maxing Out Roth IRA Contributions

Pros
  • No taxes on qualified withdrawals during retirement 

  • Can withdraw contributions at any time 

  • Have until Tax Day in mid-April to max out your contributions 

  • May access a greater range of investments in a Roth IRA than a 401(k)

Cons
  • Traditional IRA might be better for your situation 

  • No employer matching benefit as with some 401(k) retirement plans 

  • Other financial goals might be more important than maxing out your Roth IRA 

  • Contribution limits decrease or contributions may not be allowed at higher income levels

Pros Explained

  • No taxes on withdrawals during retirement: Since you already paid taxes on your contributions, you won’t have to worry about paying taxes on withdrawals in the future. 
  • Can withdraw contributions at any time: While you can’t access your earnings before age 59 ½ without penalty, you are free to withdraw your contributions. 
  • Have until Tax Day in mid-April to max out your contributions: You have until the April tax deadline to max out your Roth IRA. 
  • May access a greater range of investments than a 401(k): Employers may set restrictions with 401(k) accounts, whereas an IRA might offer a greater array of investment options or lower fees. 

Cons Explained 

  • Traditional IRA might be better for your situation: If you expect your tax rate to decrease in the future, you might save more by opting for a traditional IRA over a Roth IRA. 
  • No employer matching benefit as with some 401(k) retirement plans: If your employer offers a match, make it a priority to max out that benefit before maxing out your Roth IRA. 
  • Other financial goals might be more important than maxing out your Roth IRA: These could include paying off high-interest debt or saving for an emergency fund. 
  • Contribution limits decrease or disappear at higher income levels: Maxing out a Roth IRA might not be an option if you’re a high-income earner or file taxes separately from your spouse. 

Frequently Asked Questions (FAQs)

When is the last day to max out your Roth IRA contributions for the year?

The last day to max out your Roth IRA contributions is the IRS tax filing deadline, which typically takes place in April.

How much will my Roth IRA be worth if I max out my annual contributions?

The value of your Roth IRA will depend on your account’s return on investment and the amount of time your savings have to grow. Let’s say, for example, that you contribute $6,000 every year to your Roth IRA account. Assuming a 7% return on investment, your account would be worth $101,000 after 10 years, $288,000 after 20 years, and $655,000 after 30 years. You can use a retirement savings calculator to estimate how much your account could be worth in the future.

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