Good News! The IRS raised the contribution limit for both the 401(k) plan and IRA by $500 this year. They also raised the income limit for the IRA so if you’re borderline, you should check with the IRS if you can contribute more this year. This increased limit is great because we can save more for retirement and I’m sure many of us made a New Year’s resolution to save more in 2013.
The Roth IRA is a particularly good saving vehicle for workers who are already participating in their company’s 401(k) plan. For 2013, workers can contribute $5,500 to their Roth IRA. The great thing about the Roth IRA is once you satisfy the requirement, then you won’t have to pay any tax in that account. You can also withdraw your contribution without penalty at any time in case you need some money. The Roth IRA will give you more options to deal with taxation when it’s time to withdraw in retirement. Most of us have some retirement saving in a pre tax account like the 401(k) plan. When you withdraw the fund from the 401(k) plan in retirement, you will have to pay the regular income tax rate. If you have some saving in the Roth IRA, then you can minimize tax by mixing the withdrawal and avoiding the higher tax brackets.
Where to get $5,500?
There are a few ways to contribute to the Roth IRA. One is to contribute every month from your savings account. This is good because you can take advantage of dollar cost averaging and invest throughout the year. On the other hand, I like to contribute in one shot at the beginning of the year. Like most investors, I sold some investment near the end of 2012 so I can offset some gains. Instead of reinvesting everything, I set $5,500 aside for the Roth IRA. Now that it’s 2013, I can just transfer that $5,500 into my Roth IRA and wait for a buying opportunity. It may sound like I’m playing a shell game by just moving money around, but why pay tax when you don’t have to?
Investing early can be beneficial
A Vanguard study has shown that investing in a lump sum early on is better than dollar cost averaging. Historically the stock market rises so over the long run so the lump sum has more time to take advantage of the market gain. This is one reason to set aside $5,500 and plow it into the Roth IRA early every year. How about you? Did you make a New Year’s resolution to save more for retirement? If you did, why not go ahead and finish off the Roth IRA early? Getting one item out of the way will make financial planning a little bit easier the rest of the year.
- I’m assuming an investor will have earned income in 2013 so they can contribute to the Roth IRA.
- If you are near the income limit line, you probably should wait until the end of the year before contributing so it will be simpler.
- As Steve pointed out – watch out for the wash sale rule. Don’t sell an investment at a loss in your taxable account and purchase the same investment in an IRA within 30 days. You can’t take the tax deduction if you do this.