One downside to a Roth IRA may be its small contribution limits, depending on how much you plan to contribute. However, a Roth IRA could be an excellent option if you have already maxed out contribution limits to your 401(k) or another retirement account. 

Additionally, you can directly rollover or transfer unlimited funds from another account, tax-free, while meeting yearly contributions to maximize your gains.   

In this article, we’ll discuss ways to maximize your contributions and earnings from a Roth IRA and provide an overview of the rules and different types of Roth accounts that may be important to you.  

Benefits of Starting a Roth IRA

If you’re thinking of starting a new Roth IRA, you should be aware of the benefits and downsides that a Roth IRA provides. Here are a list of benefits: 

• Tax-free growth. Funds in a Roth IRA will grow tax-free while in your account. That means that every dollar you earn from investment can eventually be withdrawn without the government taking a cent. 
• Tax-free withdrawals. Roth accounts are funded with after-tax dollars, so there are no taxes on qualified withdrawals. 
• No age-based contribution limits:  As long as you have an income, you can contribute to an IRA. This allows parents or guardians to start a Roth IRA for a child with an earned income (more on that below).
• No required minimum distributions (RMDs). Traditional IRA holders are required to begin taking RMDs at the age of 73. This can impact account growth and diminish the value of compound interest in your senior years. Roth account holders are not required to take RMDs, allowing for higher growth potential over time. 
• No penalties on withdrawals against contributions. As long as your account is five years or older, there are no penalties for withdrawing from contributions before the age of 59 ½. Withdrawals against earnings will be penalized at 10%. This contrasts traditional IRAs, which make no distinction between early withdrawals against contributions or earnings, penalizing both at 10%. Of course, withdrawing from your account early can negatively affect growth, so proceed with caution. 

There may be some examples where a Roth IRA may not be the best option for you. For example, if you think you’ll be in a lower tax bracket upon retirement, you may benefit more from a Traditional IRA or 401(k). 

Unfortunately, IRAs do come with a lower contribution limit than most retirement accounts. This is because IRAs offer such extraordinary tax advantages that the government does not wish for everyone to pour all of their money into them. Additional limits and rules may also be imposed based on income limits and special circumstances.

However, there are ways to scale an IRA for retirement, and one of the best strategies is to maximize your yearly contributions. 

Roth IRA Contribution and Income Limits

To maximize your yearly contributions, you need to understand what limit is set by the IRS. The current base contribution limit for a Roth IRA is $6,500, though individuals 50 years or older can make a catch-up contribution of $1,000, raising the limit to $7,500. 

Unlike Traditional IRAs, Roth IRAs are also subject to additional limits based on your account filing status and modified adjusted gross income (MAGI). The table below provides the most recent limits. However, because the IRS can set new limits annually, it’s always best to consult the latest IRS guidelines to determine your limits. 

Roth IRA Contribution Limits by Tax-filing Status and Income

We should note that other ways of funding your account, such as transfers and capital gains, don’t come with any limits and allow you to grow your account faster. 

How to Fund a Roth IRA: Maximizing Contributions

Maximizing IRA contributions allows you to grow your account faster and earn more compound interest on your investments. 

There are two primary ways to fund and contribute to your IRA. 

1. Direct Deposit: Funding a Roth IRA via a direct deposit is a common, straightforward practice. This method allows you to move funds directly from one financial account, such as a checking or savings account to your newly opened IRA. All you need is your account number and banking information. You can often do this online via an account portal or directly with your IRA account holder.  
2. Transfers. Also known as a trustee-to-trustee transfer, this method allows you to move funds from one Roth IRA account to another. Note that transfers must be between accounts. If you have a Traditional IRA and want to convert it to a Roth IRA, there are alternative options. Speak to your custodian about available options and any tax consequences or penalties. 

Using these three methods, you can grow your IRA for retirement quicker than most other accounts–despite low contribution limits–by following these strategies. 

Tips to Grow Your IRA Quicker: Rolling Over to an SDIRA

• Self-Direct Your Account: Roll over your Roth IRA to a self directed IRA to start investing in high-growth assets like real estate, gold, Bitcoin, P2P lending, private equity, and much more. 

• Partner with Other IRAs: Best of all, when you switch to an SDIRA, you can syndicate real estate deals and other expensive investments with partners who also hold lots of money in their IRA. This reduces risk and allows you to scale faster with fewer funds. 

• Invest Early and Often: Putting your money to work for you allows you to earn compound interest on your capital gains. Best of all, all gains are tax-free. For example, if you flip a house for a $100,000 profit, you will never pay a dime in taxes on that property. 

• Contribute to the Yearly Maximum Limit: Contribute the maximum of $6,500, and don’t leave any money on the table so you can grow your account for retirement quicker. 

Roth IRA Prohibited Transactions

The IRS does set a list of prohibited transactions that you must be aware of to avoid penalties, especially if you own an SDIRA. 

In most cases, you’re prohibited from any transaction that benefits a “disqualified person,” which includes you as well as your spouse, parents/grandparents, and children. It also includes your IRA fiduciary and anyone who has discretionary authority over the control or administration of your account. 

Under the current IRS code, the following transactions are considered prohibited: 

• Borrowing against your Roth IRA account. 
• Using an IRA account to purchase property you or any disqualified individual intends to use for business, pleasure, or as a primary residence. 
• Selling property to your IRA account. 
• Using your IRA funds as collateral for a loan transaction. 

In addition, the IRS also sets rules on what you can invest in. In general, Roth IRAs with a self-directed structure can not be used to invest in anything considered a collectible, which includes:

• Works of art
• Antiques
• Rugs
• Metals and gems*
• Stamps and coins*
• Alcoholic beverages

*Depending on the type of Roth IRA account you have, you may be able to use Roth IRA funds to invest in specific metals and coins, namely gold, silver, palladium, and platinum. 

Types of Roth IRA Accounts

Standard Roth IRAs are a popular option for most investors, but there are specific types of Roth IRA accounts that may be better structured for certain investors. Here are three Roth accounts to consider under certain circumstances. 

Self-Directed Roth IRA (SDIRA).  

As we previously discussed, a self-directed Roth IRA places investment control in your hands and extends the list of eligible assets to include things like precious metals (gold, silver, platinum, and palladium), real estate, options, mortgage notes, tax liens, and cryptocurrency.  

To open and leverage a Roth SDIRA, you must work directly with a custodian or trustee, like Horizon Trust, that is approved by the IRS. 

Spousal IRA

In general, you can only contribute to an IRA if you have an earned income. However, if you or your spouse do not earn an income, a Spousal IRA can help you build a retirement and leverage the tax benefits allotted by a Roth IRA. In this type of account, the earning spouse can set up and contribute to a Roth IRA for their non-working spouse. 

Custodial IRA 

As mentioned above, there are no age requirements to contribute to a Roth IRA, but minors cannot open their own account. Instead, an adult, such as a parent or guardian, can open a custodial IRA in the child’s name. The funds in the account belong to the child, but they cannot access those funds until they meet the age requirements of the plan, usually 18. In many cases, a custodial IRA may be a great way to save for college and retirement–all contributions are tax-free, and you can save the earnings for retirement. 

The Bottom Line

Roth IRAs offer several advantages for retirement, and maximizing the productive power of these accounts will allow you to retire earlier. Follow the above strategies, including self-directing your account, to maximize your earnings and contributions and save for retirement quicker. 

FAQs

What are the current Roth IRA contribution limits?

For the tax year 2023, the Roth IRA contribution limit is $6,500, or $7,500 if you are age 50 or older. These limits may be subject to change based on IRS regulations and inflation adjustments.

Can I contribute to a Roth IRA if I have a 401(k) plan?

Yes, you can contribute to both a Roth IRA and a 401(k) plan in the same year. However, your ability to deduct contributions to a traditional IRA may be limited if you also contribute to a 401(k) plan. It’s important to consult with a financial advisor to determine the best strategy for your individual situation.

What happens if I exceed the Roth IRA contribution limits?

If you contribute more than the allowed limit to your Roth IRA, you may face a 6% excess contribution penalty tax for each year the excess amount remains in the account. It’s important to monitor your contributions and correct any excess amounts as soon as possible to avoid penalties.