I Maxed Out My Roth IRA and You Can Too!

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On August 31st I maxed out my Roth IRA for 2012 and it was a great feeling. Normally I’d max it out over the course of an entire year. This year was slightly different. I had a feeling I would be switching employers this year to move closer to my new townhouse.

Wait… what about 401(k) matching at my old job? My old job’s 401(k) automatically contributed 3% whether I contributed or not. Instead of putting money into a 401(k) I wouldn’t likely become vested in I contributed solely to my Roth IRA.

How I Maxed Out My Roth IRA

As I mentioned above, while I was at my previous employer I contributed all of my retirement savings to my Roth IRA every paycheck. To do this I had automatic transactions set up through Vanguard where I keep my Roth IRA. Every payday Vanguard would automatically purchase my set dollar amount of Vanguard’s Target Retirement Date 2050 Fund. It really was just as simple as that… until I switched employers…

At my new job I haven’t set up automatic purchases up yet. Part of it is being lazy and part of it is uncertainty in how the withdrawal would come out in relation to my paycheck being depositing into my account. Instead of the process being automated I now have to go on Vanguard’s website and buy my set dollar amount every paycheck. I still make my purchases every paycheck though and have never missed a purchase.

My new job has a different setup with 401(k) matching. I actually have to contribute to get my match like most people do. When I started my new job I made my Roth 401(k) contribution up to receive the full matching amount and then took the rest of my allotted retirement savings per paycheck and put it toward my Roth IRA. Now that I’ve maxed out my Roth IRA I have increased my contribution rate to my Roth 401(k) so that I am still contributing the same dollar amount per paycheck to my retirement fund.

How You Can Max Out Your Roth IRA

The easiest way to max out your Roth IRA is to set up automatic purchases that coincide with your paychecks. If you get paid 24 times a year you need to invest $208.33 per paycheck to max out for 2012 (assuming you’re under 55). If you get paid 26 times a year you need to invest $192.31 per paycheck to max out for 2012. If you receive a different number of paycheck a year divide $5,000 by the number of paychecks you’ll receive. If you are over 55 divide $6,000 by the number of paychecks.

This only works if you started with the first paycheck of the year. If you didn’t there is still hope! Just take the amount left to max out your Roth IRA and divide it by the number of paychecks you have left this year to get a per paycheck contribution amount. That might not be realistic though as 2012 is already 2/3rds over! Yikes… but there is some good news.

If you didn’t get started in time and still want to max out your 2012 Roth IRA contribution you can count all contributions made before April 15th, 2013 as 2012 contributions. It just takes a small tweak to the formula. Now you divide by the number of paychecks you will receive before April 15th, 2013 to figure out how much you need to invest each paycheck to max out.

Keep in mind these dollar amounts are for 2012 and may change in 2013. Also, there is a point where your Roth IRA contribution limits change due to your income. Make sure you know how much you are allowed to contribute to your Roth IRA before getting started.

Do you use a Roth or regular IRA and do you max it out? If you’re married do you both max them out?

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. I do not have an IRA set up this year but I’m considering it for next year. Automatic deductions sounds like the best way to go.

  2. Jason Clayton | frugal habits says:

    Nice work! Auto deductions and auto purchases is the way to go. This is exactly what I do.

    I’ve also rolled a 401k into a Roth which is a great way to fund a Roth. Keep in mind you have to pay taxes on it, but my calculations showed I would do better this way in the long run.

  3. I’m a bit confused. Were your Roth IRA contributions set up through your employer somehow? Why does it matter with whom you’re employed to make contributions? My IRA contributions have nothing to do with my employer – the withdrawals just come from our checking account at the frequency we chose.

    I believe with Vanguard you can also just tell it the withdrawal frequency you want and to max out and it will figure out for you what the contribution level is.

    My husband maxes out his Roth IRA and I’m sitting at $4200 projected for the year. I really really really want to get to the max but so far we haven’t found any additional room in our budget – maybe when we re-evaluate our budget post-move.

    • I probably could set them up through my employer but I didn’t and haven’t. The reason I contributed to the Roth at my old employer was because I didn’t want to pay the fees to get money out of my 401(k) when I left and I hadn’t contributed anything to it yet anyways. Good luck finding that last $800! I know you can do it!

  4. We have traditional IRAs simply from old rollovers but we haven’t started our Roths yet. It’s actually quite annoying but we’re simply waiting until we get out of debt. I’ve contemplated starting one and putting in a small amount each month to get the ball rolling but haven’t pulled the trigger yet.

    • I understand wanting to get out of debt. My girlfriend doesn’t have a Roth yet either but that is OK by me because she is paying off her debt!

  5. I just set up a payroll deduction and the rest is automatic. Set it and forget it! This way I am dollar cost averaging into the market.

  6. My wife and I actually don’t do automatic deductions. Since that money is gone once it’s sent over to the IRA, we prefer to save the money up in a savings account, and then when we get a fat amount, we transfer a bunch over to the IRA. But we still have some left in our savings. I guess we just get nervous about automatically giving money over and what if we suddenly need it for something??

  7. We do like TB and his wife and put $1000 in an IRA pile within our cash accounts that we transfer in one big chunk ($5K to each account) before tax time. We build in that we can miss a couple months and still hit the goal.
    It’s also worth noting that you technically have more than just the calendar year to make contributions ought 2012 you have from jan 1 2012 through April 15 2013 (tax day!) to make your 2012 contributions. If you’re making them between January and April when the years overlap, your IRA manager (Vanguard for us) will just ask which year you want the contribution to go to.

    • Only reason I don’t do that is I would rather dollar cost average personally. I’d be afraid I’d put 5k in at the height of the market that year.

  8. Nice work! Once we’re out of debt, the Roth IRA is going to get SO MAXED! I am fully vested and contributing to my 401k while still in debt, but killing the SL debt is a priority to me over the Roth. I do have some money in there because I did max it out for two years a while ago.

  9. I maxed out the Roth for the past 3 years, but expect a jump in income this year due to selling my business. I am planning on maxing out my SIMPLE IRA this year at work to offset some of the income. If we come under the income limit, I’ll do the Roth after the first of the year. Good job on your end. It feels great to get the contributions in. I also always did mine through Vanguard and set up the automatic payments to max it out. I also like how that site tells you how much you have left to contribute for a given year.

  10. I’ve been putting $425 each month into my Roth besides putting 20% into my 401(k). It’s really worth in the long run due to tax free compounding return you can get from your investment.

  11. My wife maxes out her Roth by contributing $400 a month and pays an addtional $200 at the back end to make S5000. I usually put $5000 a year when I get my bonus but next year will change it up by using my house to fund my Roth and half the wife’s.

    We recently bought a house in expensive Hawaii and the mortgage interest is around $21,000 a year, in our combined tax bracket that is worth $7,612 ($21,000 X 28% federal and 8.25% state)in tax refund subsidized by the government. We increased our withholdings to reflect the tax break so that we would get an extra $600 a month in our paychecks. That money is deposited into our Roths where it will grow tax free. As a result we build equity in our house monthly and fully fund a Roth and a half.

  12. Up here in Canada, we contribute to both an RRSP and a TFSA. We’re putting in $1000 a month into the RRSP and $100 into the TFSA, but we might flip that next year because we’d like to max out our TFSA.

  13. Woops, I mean $200 into TFSA…($100 each)

  14. Great tip on saving on a Roth IRA via automatic deduction from paycheck. Paying yourself first is really the key to a sound saving strategy.

  15. Congrats on maxing out your IRA! Now you can start squirreling away a little extra to make maxing it out next year even easier! :)

    • Thanks, I actually just shifted all of my retirement savings to my Roth 401(k) since I won’t be maxing that out this year. $17,000 is a lot of money!

  16. Great work! I actually need to start thinking about doing this. I’ve been maxing out my Roth IRA through Vanguard for the past few years but I could probably do some type of DCA to reduce my risk. Thanks for the article idea :)

    Btw, everyone should be contributing to a Roth IRA, at least holding their emergency fund in there!

  17. You can pull money out of a Roth at any time penalty free as long as it’s the principle.

    Did you know that you can get a 50% return on your retirement guaranteed on a $4000 Roth investment thanks to the federal government. It’s called a saver’s credit. As long as your family earns up to $34,000 you can earn half back what you put in on your taxes. Here’ s the link.
    https://www.nrsforu.com/iApp/tcm/nrsforu/learning/library/2012SaversTaxCreditLimits.jsp

    You can actually earn up to $68,000 as a family and qualify if you both max out your 401K which brings your AGI down to the $34,000.

  18. Roth 401K! That is a great employer! Congrats on maxing your ROTH. This is actually the first time in 3 years we won’t max both our ROTHS.

    • More and more employers seem to be offering Roth 401(k)s. I’m not going to complain. A great opportunity for me to diversify my tax strategy in case I don’t have access to one or they take it away one day.

    • I’m jealous of people whose employers off 401k’s and Roth 401k’s. Mine offers absolutely nothing. I might just start my own business so that I can have a 403B or whatever self-employed people can have. :)

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