Strategic IRA Contributions: 4 Factors for Optimal Planning

When you are planning IRA contributions, you have to think about more than just what you can afford to pay on this paycheck. The amount you contribute will affect your current financial situation, your tax obligation at year's end and your retirement savings down the line. Therefore, it is necessary to plan for both the immediate future and the long term when you decide your contribution plan.

#1 Immediate Liquidity

First, you need to remember that any money you deposit into your IRA cannot be touched for decades. Therefore, you cannot place any funds into your IRA that you will need in the immediate future. For example, you may be saving for a down payment on a home. At the end of the year, you have saved $10,000. It may seem like a great idea to place all of this into an IRA to reduce your taxable income. However, since you know you will need to allocate funds toward a house payment in the near future, you must consider your liquidity in order to meet your financial goals.  

#2 Corporate Matching

If your company offers an IRA matching program, you should take full advantage of this option. Typically, a large company will offer a 401k instead of an IRA plan to employees. Small companies are less likely to offer accounts, and their employees may set up IRAs to compensate for this. Therefore, it is rare for a company to match an IRA, which is generally an independent, rather than company-provided, account. However, some small businesses do use a company-provided IRA service for their employees. If your company offers this option and offers an IRA match, then you should weigh this heavily into your decision. Contributing at least the match amount will significantly add to your income on an annual basis. Failing to contribute to the match means you are leaving money on the table. 

#3 Tax Planning

In a given year, you may find you can save a significant amount of money simply by contributing to an IRA account. For example, if you complete your tax return and find out you owe $500 to the IRS, you could contribute about $2,000, depending on your tax bracket, to an IRA and owe nothing to the IRS. This means, instead of keeping $1,500 in cash at the end of the year, you get to keep all $2,000. 

#4 Other Savings

The amount you save in other ways will affect the decisions you make with your IRA. Saving only for retirement will not help you if you do suffer an immediate fiscal emergency. It is more important to first provide yourself security in the short term than in the long term. Therefore, make sure you have three month's salary saved prior to contributing to your IRA. This will allow you to pay bills and avoid bankruptcy if you lose your job. Saving for other immediate expenses, such as putting a child through college, may or may not trump retirement savings. Remember: you can take loans for some things, but you cannot take a loan for retirement. Consider this when deciding what to save for.