If you’re looking for ways to increase your retirement savings beyond what you have in your employer’s 401(k) account, there’s a lineup you should consider. Here’s a list of ways to increase your overall retirement planning opportunities.
Start With the Obvious: 401(k) Plan
Likely the single most productive retirement planning vehicle you have available is your employer’s 401(k) plan.
These plans make it easy for you to save because your regular contributions to them are made by payroll deduction. You never see the money. So, you can’t spend it.
More importantly, your employer may actually put in additional money for you. Matching contributions (typically a percentage of what you contribute up to a set limit) could significantly increase your savings.
You should pay close attention to vesting rules and eligibility on your employer’s match. The reason for this is that matching contributions are free money. You’re entitled to them just for participating in the plan. All you have to do is contribute.
Contribute to Your Traditional IRA – Whether it’s Deductible or not
Everyone who has wages can contribute to a Traditional IRA. This is the case regardless of age. So, it’s never too early to start.
An IRA is a powerful retirement planning tool because your investments compound tax deferred. Compounding is the return you earn on your investment’s returns.
For most people contributions are also tax deductible. Their deductibility begins to phase out based on your income and filing status. But deductibility should not be the main reason to contribute to a Traditional IRA.
So, if your income is so high that you’re prevented from deducting your IRA contributions, you should still make them. After all, the main role of your retirement account is to save for the future, not to get a current year tax deduction.
More importantly, the future value of your contributions will be more valuable to you in retirement than the tax deductions they would have created (if they were deductible). The tax deferred compounding can more than compensate you for any perceived lost tax savings.
One More Point About Nondeductible Contributions
In addition to your Traditional IRA, consider adding a Roth IRA to your retirement planning mix. Contributions to a Roth IRA are not deductible but distributions don’t create taxable income.
Roth IRA accounts are not available to everyone. Eligibility phases out based on your income and filing status. High income earners can’t contribute at all.
A great utility of the Roth IRA is that it can help you optimize Social Security. Because distributions don’t create taxable income, you can live on distributions from your Roth IRA and keep your Social Security benefits from being taxed.
Your Roth IRA also gives you flexibility to delay taking Social Security. You can use your Roth in conjunction with your Traditional IRA to postpone Social Security. Or you can use it alone and allow your Traditional IRA to continue compounding tax deferred for a longer period.
But you have to be older than 59½ and the money has to have been in the account for at least 5 years before you begin taking distributions. Otherwise, they are subject to an early withdrawal penalty.
Your Health Savings Account is a Quasi-IRA
If your employer offers you a Health Savings Account (HSA), take advantage of it…especially if they contribute to it. The match, like your 401(k)’s, is free money.
An HSA compounds tax free and withdrawals to pay medical expenses aren’t taxable. So, you can use it to pay medical expenses (which late in life are typically pretty big) without generating taxable income like an IRA would.
Adding it all up
While an ideal retirement planning strategy might be to contribute the maximum to your 401(k), Traditional IRA, Roth IRA and HSA accounts, that may not be possible for everybody. But the reason to contribute as much as you can to as many accounts as possible is because of their long-term benefits:
- Building retirement savings
- Reducing taxable income
- Compounding tax deferred
The tax-deferred compounding bullet is probably the most important here.
It is the component of each account that can really augment your long-term returns. Over time, compounding can multiply the future value of your contributions.
Consult your retirement plan advisor for guidance designing the optimal structure for your business.