As you plan for retirement, here are 6 retirement savings strategies you should consider when discussing retirement plans with your financial advisor.
Saving for retirement is a vital part of a healthy financial plan. For most people, Social Security will not provide enough for a financially secure retirement, so it’s important to set aside funds for your own future.
However, you’re not completely on your own. Many employers are committed to helping their employees save more for retirement, and the IRS offers opportunities for retirement savers to benefit from tax savings. Even if you’re saving for retirement already, there may be other ways to boost your savings even more. Consider these six savings strategies that can help you meet your retirement goals faster.
1. Know the Tax Benefits of Retirement Savings
There are several ways to cut your tax bill through saving for retirement. You can choose to lower your tax bill now as you’re saving or lower your tax bill later when you’re retired.
For example, tax-deferred investments, such as traditional IRAs and 401(k) plans, allow you to deduct your contributions from your taxable income in the year you made the contributions. So if you contribute $5,000 this year to your traditional IRA, you’ll deduct $5,000 from your taxable income when you file taxes next year. Instead of paying now, you’ll pay taxes on the contributions when you withdraw them in retirement, at your regular tax rate.
With tax-exempt retirement accounts, such as Roth IRAs and Roth 401(k) plans, you pay taxes on contributions in the year that you make the contributions. But when you withdraw from the accounts in retirement, you pay no taxes on the funds. If you expect to be in a higher tax bracket later in life, a tax-exempt account can save you money, as you’ll pay taxes at your lower rate now and owe no taxes on your withdrawals later.
There are income limits to qualify to contribute to a Roth account. In 2020, if your income is higher than $139,000 as an individual or $209,000 as a married couple, you can’t contribute to a Roth account.
2. Check Out Saver’s Credit
Middle- or lower-income taxpayers can claim a tax credit for up to 50 percent of their retirement plan contributions. A credit is different from a deduction because it is subtracted directly from the tax you owe rather than from your taxable income. So if you qualify for the savings credit and you saved $1,000 in a retirement account during the year, you can take $500 off the amount of tax you owe.
The income limits change periodically, but for 2020, individuals with a maximum income of $32,500 or married couples with a maximum income of $65,000 can take this credit. The maximum credit is $2,000 for married couples filing jointly and $1,000 for individual filers.
3. Use Your Employer’s Match
Many employers offer a matching contribution in employer-sponsored retirement plans such as 401(k) or 403(b) plans.
If your employer offers a match, all you have to do is contribute the necessary amount to earn the full match. For instance, if your employer will match your contributions up to 6 percent, you need to contribute 6 percent of your income to the plan—and with the employer match, you’ll get 12 percent of your income saved to the retirement plan.
4. Explore Self-Employment Retirement Plans
If you have any self-employment income, even if it’s from a side gig as an Uber driver, you’re qualified to contribute to a solo 401(k) or a Simplified Employee Pension (SEP) plan, which are retirement plans for the self-employed. These are viable tools for retirement savings because they allow self-employed individuals to save a lot more money than they can save in a regular IRA.
The amounts change periodically, but in 2020, you can contribute up to $6,000 in an IRA, or $7,000 if you’re over age 50. With a SEP, you can contribute up to 25 percent of your net self-employment income, up to $57,000 in 2020. In a Solo 401(k), you can invest up to $19,500 in 2020 (or $26,000 for taxpayers age 50 and older).
5. Set Up Direct Deposit of Your Tax Refund Into Your IRA
If you’re getting a tax refund, it’s the perfect opportunity to direct extra funds into your retirement account. You can avoid any temptation to spend the refund by directing the IRS to deposit it directly into your traditional, Roth or SEP IRA.
You can use the direct deposit line on Forms 1040, 1040A or 1040EZ to direct your whole refund into a single IRA. You’ll need the IRA’s routing and account numbers. If you want to have your tax refund split up into various accounts, use IRS Form 8888.
6. Use a Health Savings Account
A health savings account (HSA) paired with a high-deductible health plan allows you to sock away tax-free money to use toward healthcare expenses—but it can also be a valuable tool for retirement planning.
If you have a high-deductible health plan with an option for an HSA, be sure to open an HSA. You (or your employer) can contribute up to $7,100 for a family or $3,550 for an individual during 2020. Contributions are completely tax deductible and if you don’t use the funds for medical expenses during the year, they can be invested and continue growing. You don’t lose the funds when they are unused, as is the case with a flexible spending account (FSA), which is sometimes confused with an HSA.
If you choose not to use the funds in your HSA for medical expenses, or if you simply don’t need them for medical expenses, they can keep growing and become a valuable part of your retirement savings. After you reach age 65, the funds in your HSA can be withdrawn tax-free for any use, not just medical expenses.
Retirement saving isn’t easy, but strategies like these can make it easier. When you take advantage of employer programs or tax savings, saving for retirement can be rewarding now—as well as later.