How Much Money Should I Save When I Enroll in a Roth IRA?

Financial advisers can help you determine how much to save and invest in a Roth IRA.

Roth IRAs provide an investment vehicle with tax advantages that most people can benefit from. The advantage of the Roth is that it will allow you to put away money and earn on your investments, tax free, until you are ready to use the money. To qualify, you must be single and make less than $95,000 per year or married making a joint income of $150,000 or less. The amount of money you should save when enrolling in a Roth IRA depends upon your investment goals.

Instructions

1. Divide $5,000 by 12 if you wish to save for your Roth IRA on a monthly basis. The IRS allows up to $5,000 per year, as of 2011, in annual contributions, or your taxable compensation for the year if you make less than $5,000. Ideally, you should put the maximum amount allowable into your Roth because this money is tax deductible. On a 12-month savings plan, this computes to approximately $416. This applies if you're younger than 50. Different rules apply for those 50 and older.

2. Determine the maximum amount of your paycheck you can reasonably put away for your Roth IRA savings. You should put away the entire $416 if you can afford it, in order to maximize your tax savings and get the most out of your investment opportunity. If you cannot put away that much on a monthly basis, shoot for as much of this amount as you can.

3. Tuck away $6,000 per year, or $500 per month, if you are older than 50. This is the maximum amount allowed by the IRS. Remember that you can take the money you contribute out at any time without penalty, because these contributions are made after you have already paid withholding tax. Your earnings will only be taxed when you use them.

4. Examine your financial situation to ensure that your contributions won't put you in a financial pinch or that the money could reasonably be used to pay off other debt. It does you no good to put your money into a Roth IRA if you are paying in excess of 20 percent on a large amount of credit card debt. Pay off your debt first.

5. Consider splitting your contributions between a Roth IRA and a traditional IRA. The maximum amount allowable between the two investment vehicles remains the same at $5,000 or $6,000, depending on your age. Consult a financial adviser to determine the advantages to splitting your contributions in this way.

References

• Get Rich Slowly: How to Start a Roth IRA (and Where to Do It)
• Kiplinger: Why You Need a Roth IRA
• Key Bank: The Best Ways to Save — Make IRAs and 401(k)s Grow