- If you want to fast-track your retirement savings, you have several options.
- Take advantage of strategies that reduce taxes now and provide income later.
- Your advisor can help you choose the investment vehicles that fit your goals and needs.
What does your dream retirement look like? If your wish list gets longer (and more expensive) every time you think about it, personalized advice and smart planning can help you bring your vision to life. Check out these five ways to rev up savings:
1. Maximize your employer’s retirement plan
If you are eligible for your employer-sponsored 401(k) plan, the company match (if offered) is literally free money. Contribute at least the amount your employer will match.
In addition, consider contributing the maximum allowed — for 2020, that’s $19,500. If you are age 50 and over and want to boost savings, in 2020 you can contribute an additional $6,500 to your 401(k) account.
- Contributions come out of your paycheck before taxes, reducing your taxable income.
- Earnings on before-tax contributions and employer contributions are tax-deferred.
Your employer-sponsored plan likely offers a number of investment options, and your advisor can help you choose the ones appropriate for your financial goals, risk tolerance and time horizon.
2. Invest in a Roth IRA or traditional IRA
An individual retirement account, or IRA, offers another way to save. Two of the most common are Roth IRAs and traditional IRAs.
Investing in a Roth IRA can help you build more tax-free income for the future. Earnings grow tax-free, and qualified withdrawals are generally tax-free if you satisfy certain requirements. This enables you to keep more of your income — which is especially beneficial if you expect to be in a higher tax bracket in retirement.
More about Roth IRAs:
- You can make contributions to your Roth IRA as long as you have income. Your contributions might be limited based on your filing status and income. Talk with your advisor to learn more.
- A Roth IRA is never subject to required minimum distributions (mandatory distributions that activate once you reach age 72).
- You can make withdrawals from your Roth IRA contributions at any time without penalty, but you will owe taxes and penalties on earnings you take out before age 59 1/2, unless you qualify for an exception.
If you think you will be in a lower tax bracket in retirement — or if your income is currently too high for a Roth IRA — you might want to consider a traditional IRA. Here are the highlights to start a conversation with your advisor:
- Earnings and gains in a traditional IRA grow tax-deferred and generally are not taxed until you start taking distributions.
- Contributions you make may be fully or partially deductible, depending on your circumstances.
- There are no income restrictions for contributing to a traditional IRA or converting those funds to a Roth IRA in the future.
- Your required minimum distribution — the minimum amount you must withdraw from your account every year — begins at age 72.
3. Open a health savings account
A health savings account, or HSA, does double duty: It can help you pay medical expenses now, and it’s an option to save for retirement. To qualify to contribute to an HSA, you must have a high-deductible health insurance policy.
HSAs are “triple tax-advantaged” because they provide these benefits:
- Contributions are pre-tax, which reduces your taxable income.
- Earnings grow tax-deferred.
- Withdrawals for medical expenses are tax-free.
After you reach age 65, you can withdraw HSA funds for non-medical reasons. You will pay taxes on the withdrawals, but you can use the money for other expenses.
4. Use SIMPLE, SEP or solo 401(k) plans if you have 1099 earnings
If you earn freelance (1099 reported) income, you might be able to contribute to a Savings Incentive Match Plan for Employees (SIMPLE) IRA, a Simplified Employee Pension (SEP) IRA or a solo 401(k) — even if you already contribute to a 401(k) with your primary employer. Before you max out both your company 401(k) and one of these plans, check the IRS contribution limits, and talk with your financial advisor or tax advisor.
5. Adjust your exposure to growth-oriented investments
Investing in stocks with a goal of growing your investment principal can be a good source of income for retirement. Your time horizon must provide the opportunity for the investment value to appreciate, and you need to be willing to tolerate fluctuations in your account value over time. Your advisor can help you develop a long-term investment strategy based on your financial goals, risk tolerance and time horizon.
Take advantage of our experience
Talk with your advisor about your progress toward retirement savings goals and whether it might be helpful to take action with one or more of these strategies. Your advisor can provide you with personalized advice to help you achieve your goals.