How Military Members Can Max Out Their IRAs Each Year

Stylized words reading Individual Retirement Account

The Thrift Savings Plan is the first thing that comes to mind when many military members think about investing. The TSP is a great investment vehicle and should be a big part of your retirement planning. However, there are other retirement plans you may be able to invest with, including an Individual Retirement Arrangement, or IRA.

IRAs have a few advantages over investing with the TSP. First, you have access to a wider range of investments. The TSP is limited to five basic stock and bond funds, plus a variety of target date funds. But IRAs can hold investments in stocks, bonds, mutual funds, Exchange Traded Funds (ETFs), precious metals, real estate and much more. Just make sure your investments fit in your overall investment strategy.

In addition, IRAs are not tied to your job, so anyone with earned income can invest in one. And spouses without earned income are also eligible to contribute to a Spousal IRA. This means spouses have an opportunity to build retirement savings even if they do not have access to a TSP, 401k, or another employer-sponsored retirement plan.

Opening an IRA

The first step is to open an IRA. You can open an IRA at many financial institutions, including large investment companies like Vanguard, Fidelity, or Charles Schwaab, online brokerages, many banks, credit unions and other investment firms.

Be aware of any possible fees associated with any account you open. Many companies don't charge any fees to open and maintain an IRA.

When you open your IRA, you will need to do two things: decide whether to choose a Roth or Traditional IRA, and decide how to invest your funds. You can learn more about the first decision in this article which discusses Roth & Traditional TSP (the concepts are the same). For the second question, refer to your overall investment strategy.

How Much Can You Invest in Your IRA?

The IRS allows individuals to contribute up to $6,000 into an IRA each year (plus a $1,000 catch-up contribution for those age 50 and above). That means a couple can contribute up to $12,000 between the two of them, or up to $14,000 if they are ages 50 and up.

That's a lot of money to come up with. Let's look at some ways this can be accomplished.

How to Max Out Your IRA

It can be difficult to balance saving for the future with your current financial needs. One way to make things easier is to automate your savings and investments.

Let's start with a target:

  • $6,000 per individual, or
  • $12,000 per couple.
  • Add $1,000 for each person over the age of 50

That comes out to the following monthly contributions:

  • $500.00 per month for an individual
  • $1,000.00 per month per couple
  • Age 50 or over - $583.33 for an individual, or $1,166.66 for a couple.

You can also cut those numbers in half if you set up an automatic investment to come directly from your paycheck or you can invest the entire amount at once if you have it in your savings.

Invest All at Once, or Use Dollar Cost Averaging?

Once you have your goal, you need to decide whether or not you should invest in a lump sum, or use Dollar Cost Averaging to invest in your IRA. Dollar Cost Averaging is making regular investments, such as monthly, or from your paycheck.

If you don't have the money to make a lump sum contribution, the answer is easy - you need to make some kind of payment to max out your IRA. If you do have the funds available to afford to make a lump sum contribution, the answer depends on your risk tolerance, emergency fund and other factors.

Multiple studies, including this Vanguard white paper, show lump sum investing is frequently better over the long run than Dollar Cost Averaging. The premise behind this is that the market tends to go up over the long run, so the longer you have your money in the market, the longer it has to appreciate.

Of course, that is no guarantee. This article explores the pros and cons of investing in a lump sum or dollar cost averaging.

The short answer is: if you have the means to do it, lump sum investing is usually the way to go. Otherwise, dollar cost averaging will be just fine.

What About Your Thrift Savings Plan or Other Investments?

Most people also try to invest in their TSP or company 401(k) plan if they have one available. For most people in a lower tax bracket, it is best to contribute up to the agency match, then invest in an IRA.

If you are in the legacy military retirement system, you won't have a matching contribution from the government. So you may find it better to invest in an IRA to take advantage of your current low tax rate.

If you are participating in the Blended Retirement System, then you may find it beneficial to participate in the TSP up to the agency match (5% of your base pay), then contribute to your IRA if you still have available funds.

If there are funds left over after maxing out your IRA, or if you made a lump sum contribution, then you should add more to your TSP to take advantage of the tax deferments. You will need to look at your personal situation to decide what makes the most sense in your situation.

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