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IRA Financial Blog

Max out Your IRA One Paycheck At a Time

How to save for retirement while being self employed

You can easily max out your IRA by saving a small portion of every paycheck you earn. With some discipline and budgeting, this is a goal you can easily achieve.

Key Points
  • You can max out your account by allocating just over $200 per paycheck.
  • Use some or all of your tax refund if you fall behind schedule.
  • Establish an IRA that fits your needs, such as the types of investments you want to make.

Do you envy individuals you know who have maxed out their IRA? Don’t, because it’s much easier than you may think. Unlike a 401(k), an IRA has a relatively low maximum contribution limit. The IRA contribution in 2020 is $6,000 if you’re under the age 50, and $7,000 if you’re age 50 and older. Compare that to a 401(k), which has a maximum contribution of $19,500 (under 50) and $26,000 (50 and older). So, if maxing out your IRA is a goal, you can easily achieve it one paycheck at a time.

According to a report by the Investment Company Institute, roughly 36% of U.S. households save for retirement with an IRA. Data from the Employee Benefit Research Institute revealed that 47.6% who contributed maxed out their IRA. If you want to max out your account, don’t think of it as saving $6,000 or $7,000 a year. That’s a large number that can seem overwhelming and difficult to achieve. Instead, when you look at it in terms of saving a small portion of each paycheck, you will realize that it’s not difficult at all.

How Much You Need to Save

Let’s assume you receive bi-weekly paychecks: you would earn 26 paychecks per year. In order to save $6,000 a year, you will have to take out roughly $230.76 (minimum) from every paycheck. If you are age 50 and older and want to take advantage of the catch-up contribution, you will have to save roughly $269.23 every paycheck.

You can also take advantage of your tax refund and your bonus, if your company provides one. The average tax refund in 2019 was $2,781. You can put half or just a portion of that into your IRA if you’re behind schedule with your paycheck allocations. The same goes for your bonus. Approximately two out of three companies give their employees a holiday bonus at year-end. If you haven’t reached the amount to max out your IRA, use your bonus to take you to the finish line.

Types of IRAs to Prepare You for Retirement

An IRA is a vehicle that allows you to save for retirement in a tax-deferred or tax-free manner. You are also allowed to use your retirement funds to make investments. The most common type of IRA is the Traditional IRA, that allows you to invest in stocks, bonds, CDs and other traditional investments tax-deferred. The Roth IRA works in the same manner, but because you pay taxes upfront, the income/gains are tax-free when you take a qualified distribution. You can establish a Traditional or Roth IRA at your local bank or financial institution.

Another type of IRA that has increasingly gained popularity over the years is the Self-Directed IRA. This is just like a Traditional IRA, but it allows investors to purchase both traditional and alternative investments. Popular alternative investments include real estate, precious metals, private business/placements and tax liens/deeds. But in order to make alternative investments, you must establish your account at a passive custodian, also known as a Self-Directed IRA custodian. A Self-Directed IRA can be funded with after-tax or pre-tax funds.

Other commonly known IRAs include the SEP IRA and the SIMPLE IRA. If the company you work for doesn’t provide a retirement plan, you should always establish an IRA, but the type you choose will depend on your needs (i.e., the type of investments you wish to make).

Self-Directing Your IRA

The Self-Directed IRA is an advisable choice. It allows for investment diversification, and is a good shield against stock market volatility. Additionally, many alternative assets are hard assets that have intrinsic value. During times of global and political unrest, while traditional investments often underperform, hard assets like gold and real estate continue to produce a steady stream of income.

At IRA Financial, we specialize in the establishment and administration of Self-Directed IRAs. We have helped thousands of our clients gain the ability to invest in almost any type of investment tax-free. We have a team of in-house tax and ERISA professionals who will ensure that all tax structures of the Self-Directed IRA are IRS compliant.

After you have achieved your goal of maxing out your IRA, you can self-direct it to make profitable investments you truly understand. Get started today. Contact IRA Financial directly at 800-472-0646.


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