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There are several ways to fund your Roth IRA. Just make sure you do.

Quick Summary

  • For 2019, you can contribute up to $6,000 to a Roth IRA. If you’re age 50 and older, you can make an additional $1,000 catch-up contribution.
  • Try to max out your Roth IRA each year so you can take advantage of the power of compounding.
  • There are several ways to fund a Roth IRA.

A Roth IRA is a terrific way to save for retirement. While you don’t get an upfront tax break, your contributions and earnings grow tax-free. And when you take qualified distributions, they’re tax-free, too. If you expect to be in a higher tax bracket in retirement than you are now, that can be a smart tax strategy.

Roth IRA Benefits

Roth IRAs have other perks, as well. Unlike traditional IRAs, there are no required minimum distributions during your lifetime. If you don’t need the money, you can leave it in the account to grow. You can pass your entire Roth IRA to your beneficiaries, providing them with years of tax-free growth and income.

There’s also no age limit for making contributions. As long as you have earned income, you can keep adding to the account, even if you’re 100 years old.

For 2019, you can contribute up to $6,000 to a Roth IRA—or $7,000 if you’re age 50 or older—provided you meet IRS income limits. If you can contribute the full amount, make sure you do. Whether you contribute the full amount or something else, here’s how to fund your Roth IRA.

Open (and Fund) an Account with a Roth IRA Provider

Before you can fund a Roth IRA, you have to open an account. Nearly all investment companies, including banks and brokerage firms, offer Roth IRA accounts.

Before you apply, make sure you’re eligible for a Roth IRA. You need to have “earned income” that matches or exceeds your Roth IRA contribution for the year. And your modified adjusted gross income must be within IRS limits.

In most cases, you can take care of the application online. You’ll need the following:

  • A driver’s license (or some other photo ID).
  • Your Social Security number.
  • Your banking details, including the routing number and account number.
  • Your employer’s name and address.
  • Beneficiary details.

Once your application is approved, you can fund your first contribution with cash, a check, or a bank transfer.

Fund it With a Roth IRA Rollover

Another way to fund a Roth IRA is by converting or rolling over funds from another account. You can move money into your Roth IRA from a(n):

Keep in mind that a Roth conversion is a taxable event. When you move money from a pre-tax retirement account (such as a traditional IRA) to a Roth, you’ll owe taxes on that money. In general, it’s a good idea to save a conversion for a year when:

  • You earn too much to contribute to a Roth directly, and you expect to be in a higher tax bracket later.
  • It won’t bump you up into a higher tax bracket.
  • The account you’re moving has suffered losses (a lower balance means you’ll owe less tax at conversion time).
  • Your income is lower than usual (for example, you were unemployed for part of the year or took a medical leave).

Set It And Forget It

You have until the tax year’s filing deadline to contribute to your Roth IRA. For 2019, that’s April 15, 2020. But you don’t have to wait until then. You can add money to your account as early as Jan. 1 of the current tax year.

You can make one large contribution—at any point between Jan. 1 and mid-April—if you have the cash on hand to do so. For most people, however, it’s easier to make several smaller contributions throughout the year.

If you do that, it’s a good idea to set up a Roth IRA contribution schedule. Decide if you want to contribute daily, weekly, biweekly (perhaps with your paycheck), monthly, quarterly—whatever works best for you. Mark those dates on your calendar and then make sure you add the funds to your Roth IRA.

Of course, that can be a lot to keep track of. Fortunately, you can set up automatic transfers from your bank so you don’t forget to invest. To do so, contact your Roth IRA provider (or look on its website) and elect automatic investing (your provider may call it something else).

Automatic investing is usually very easy to set up and it ensures you’ll stick to your contribution schedule. And that way, you can take full advantage of compounding.

The Power of Compounding

IRAs are great tools to take advantage of the power of compounding. Compound interest is interest earned on money that already earned interest. Think of it as the snowball effect.

Say you add $6,000 to your Roth IRA in Year 1. If it earns 8% interest, you’ll have $6,480 after one year. Not bad. In Year 2, you make another $6,000 contribution. But this time, instead of earning money just on your contributions, you’ll earn interest on Year 1’s interest, as well. It takes a few years for compounding to really work its magic. But see what happens after fifteen years:

After 15 years, you will have contributed $96,000. But your account balance will be almost twice that—$181,946—because of the power of compounding.

The bottom line is this: No matter how you fund your Roth IRA, make it a habit, and start as early as possible. If you open a Roth IRA when you’re 20, for example, and contribute $6,000 a year until you retire at age 65, you’ll have more than $2.5 million heading into your golden years. And it will all be tax-free.

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