3 Smart Moves to Make With Your IRA

Maurie Backman, The Motley Fool

Once retirement rolls around, you'll need money to pay your living expenses. Some of that income can come in the form of Social Security, but those benefits are only enough to replace about 40% of the average earner's pre-retirement income. Most seniors, meanwhile, need close to double that amount, and personal savings are often required to cover that remainder.

If you're saving in an IRA at present, you're doing a good thing for your retirement. And if you make the following moves, you stand to benefit from that account even more during your golden years.

1. Max out

Many workers struggle to max out a 401(k) because the annual contribution limits are so high: $19,000 for those under 50, and $25,000 for anyone 50 and older. IRA annual contribution limits, on the other hand, are much lower -- $6,000 for workers under 50, and $7,000 for those 50 and over. As such, maxing out becomes more feasible, and if you do so for a long period of time, you stand to accumulate some serious wealth.

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Imagine you're able to max out an IRA at the current limits between the ages of 37 and 67. If your investments generate an average annual 7% return during that 30-year window, you'll have about $598,000 by the time you retire. And that, coupled with Social Security, could buy you the comfortable lifestyle you want.

2. Invest aggressively if time is on your side

Your IRA isn't going to grow without an effort on your part; you'll need to develop a strong investment strategy to turn your contributions into an even greater sum of money. And if you're many years away from retirement, that generally means loading up on stocks.

In the example above, we saw that a 7% return -- which is what you're likely to get with a stock-heavy portfolio provided you stay invested for 10 years or more -- turned a total of $197,000 in out-of-pocket contributions into an ending balance of $598,000. That's a solid $400,000 gain over time. But watch what happens if you invest too conservatively. If you split your assets more evenly between stocks and bonds (which are less risky but tend to deliver much lower returns than stocks), you might wind up with more like a 5% average annual return, which, in our example, would bring your total IRA balance to $424,000 -- still a nice chunk of money, and a decent gain, but not nearly as good as an ending balance of $598,000.

That's why it pays to load up on stocks in your IRA, especially if you're relatively young. Only once you're within 10 years of retirement should you think about getting more conservative by moving away from stocks and favoring bonds.

3. Consider a Roth

When you contribute to a traditional IRA, that money goes in on a pre-tax basis. If you max out at $6,000 this year (assuming you're under 50), that's $6,000 of income the IRS can't tax you on. But when the time comes to take distributions from your account in retirement, you'll pay taxes on those withdrawals.

You can avoid those taxes, however, if you choose a Roth IRA instead. With a Roth, there's no immediate tax break on your contributions, but your savings do get to grow tax-free, and your withdrawals will be tax-free in retirement. You'll also avoid required minimum distributions with a Roth IRA, which are mandatory withdrawals the IRS forces you to take or otherwise face steep penalties.

Now, not everyone is eligible to fund a Roth IRA directly. If you earn more than $137,000 as a single tax filer, or more than $203,000 as a married couple filing jointly, you'll be barred from making direct contributions this year. You can, however, put money into a traditional IRA and then convert that account to a Roth after the fact. You'll pay taxes on the sum you move over, but you'll then get to reap the many benefits Roth IRAs offer.

Opening an IRA is a great way to build savings for retirement. Make these smart moves, and you'll have more to celebrate once your golden years roll around.

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