Don’t forget to choose which stocks, mutual funds or ETFs you may want to invest in. You can find out what types of retirement accounts you need to fund, and in what order they can cause a serious case of paralysis – especially if you’re one of the lucky workers to have access to Roth IRAs, 401 (k) plans and health savings accounts.
You can name the pros and cons of 401 (k) s, HSAs and Roth IRAs, and outline the various IRS restrictions and tax implications associated with each of these accounts – and still not be closer to a decision on where you should place. money.
Doing a personal analysis can be helpful as it helps you to handle your situation better. But if you prefer to start with a generally solid retirement contribution strategy for 2021, then check out the framework below. It prioritizes account-type contributions in a waterfall format, which means you will start at the top and keep moving down until you have used up all the funds you have budgeted for your retirement savings this year.
1. Contribute enough to your 401 (k) to maximize your employer contest
A recent report from the Plan Sponsor Council of America concluded that the average match rate of 401 (k) for employers was 5.3% in 2019. If you earn $ 50,000 a year, it will be $ 2,650 free money that you can add to your retirement nest. egg.
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Ask your plan administrator or human resources department to explain the rules for compliance with your business and then set your contribution rate accordingly. Some employers will match dollar for dollar, while others will match $ 0.50 for every dollar. Either way, there will be a limit to what your employer will fund. Set your own 401 (k) contributions high enough so that by the end of the year you will have every cent of corresponding funds at your disposal.
2. Maximize your HSA contributions
Look at sending money to a savings account (HSA) if you can finance one. Its use is limited to people and families with high deductible health insurance plans, but HSAs are attractive for long-term savings because they offer a triple tax benefit. Contributions to them are tax deductible, the earnings in them are tax deductible and withdrawals from them used for medical expenses are tax free. And once you turn 65, you can withdraw money for non-medical reasons, without penalty. However, these withdrawals are taxed as ordinary income, just like a 401 (k) distribution.
This means that there is no risk of over-financing an HSA. If you do not use the money for medical expenses, you can use it to supplement your other retirement savings.
By 2021, you can contribute up to $ 3,600 to an HSA if you have an individual health plan, or up to $ 7,200 if you have a family health plan.
3. Make Roth IRA contributions if you can
After maximizing your HSA, see if you are eligible to contribute to a Roth IRA. Your income will be the most important factor. The IRA contribution limit in 2021 is $ 6,000 or $ 7,000 if you are 50 or older. But as a single file, you can only contribute to the limit if you earn less than $ 125,000 a year. Married filers should earn less than $ 198,000. You can contribute a reduced amount, as long as you do not earn more than $ 140,000 per year as a single file or $ 208,000 as a married file.
Roth contributions are not tax deductible, but qualified retirement benefits are tax-free. This provides good tax diversification at retirement, as 401 (k) and non-medical HSA withdrawals will be taxable. Roth contributions are especially practical if you are retiring at a higher tax rate than today.
4. Maximize your 401 (k) contributions
Alternatively, you can accept 401 (k) Roth contributions – and the income limit will not apply there. Ask your plan administrator if you have the feature and, if so, how to configure it.
By 2021, you can deposit up to $ 19,500 in your 401 (k) in Roth and regular contributions. If you are over 50, your contribution limit is $ 26,000.
5. Invest via a traditional IRA or standard brokerage account
After capturing all of your employer matches, maximizing your HSA contributions, depositing money into a Roth account, and hitting the 401 (k) contributions, go ahead and invest through a traditional IRA or in ‘ a taxable brokerage account. Traditional IRAs give you tax deductions, and while you will not get any tax benefits with a regular taxable brokerage account, you will be able to use the money as easily as you like.
One step at a time
In fact, you probably do not have $ 25,000 or $ 30,000 to save for retirement each year. Do not be discouraged by it. You can still build a portfolio that is sufficient to fund a comfortable retirement. Set a goal for now to contribute at least enough to your 401 (k) to earn your full employer match. Then, as your income increases, you need to distribute your contributions into your various accounts. This should put you on the right track for the exit you want.