Forget choosing which stocks, mutual funds or ETFs you want to invest in. Finding out what types of retirement accounts you should fund and in what order can cause a serious analysis paralysis case by itself – especially if you are one of the lucky workers who have access to Roth IRAs, 401 (k) plans and retirement accounts. health savings.
You could list the pros and cons of 401 (k) s, HSAs and Roth IRAs and diagram the various IRS restrictions and tax implications associated with each of these accounts – and still be no closer to deciding where to put your money. .
Doing a personal analysis can be helpful if it helps you to better deal with your own situation. But if you prefer to start with a generally sound retirement contribution strategy for 2021, take a look at the structure below. It prioritizes contributions by account type in a cascading format – meaning that you would start at the top and continue down the list until all funds budgeted for retirement savings are exhausted this year.
1. Contribute enough to your 401 (k) to maximize your employer’s correspondence
A recent report by the Plan Sponsor Council of America concluded that the employer’s average 401 (k) equivalence rate was 5.3% in 2019. If you earn $ 50,000 a year, that would be equivalent to $ 2,650 in free money that you could add to your retirement egg nest.
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Ask your plan administrator or human resources department to explain your company’s matching rules, then set your contribution rate accordingly. Some employers combine dollar for dollar, while others may combine $ 0.50 for each dollar. Either way, there will be a limit on your employer’s funding. Set your own 401 (k) contributions high enough that, by the end of the year, you will receive every penny of the equivalent funds available to you.
2. Maximize your HSA contributions
Then, try to send some money to a health savings account (HSA), if you can finance one. Its use is limited to people and families who have 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, their earnings are deferred from taxes and their withdrawals that are used for medical expenses are tax-free. And when you turn 65, you can withdraw money for non-medical reasons without penalty. These withdrawals, however, will be taxed as regular income, as well as a 401 (k) distribution.
This means that there is no risk of over-financing an HSA. If you don’t use the money for medical expenses, you can use it to supplement your other retirement savings.
In 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 contributions to Roth IRA, if you can
After you have reached the limit of your HSA, see if you are eligible to contribute a Roth IRA. Your income will be the main factor. The IRA 2021 contribution limit is $ 6,000 or $ 7,000 if you are 50 or older. But as a single archiver, you can only contribute to the limit if you earn less than $ 125,000 a year. Married architects have to 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 filer or $ 208,000 as a married filer.
Roth’s contributions are not tax-deductible, but qualifying distributions on retirement are tax-free. This offers good tax diversification on retirement, as 401 (k) and non-medical HSA withdrawals will be taxable. Roth’s contributions are especially practical if you expect to be in a higher tax bracket on retirement than you are today.
4. Maximize your 401 (k) contributions
Alternatively, your 401 (k) may accept Roth contributions – and the income limits would not apply there. Ask your plan administrator if you have this feature and, if so, how to set it up.
In 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 through a traditional IRA or standard brokerage account
After capturing all of your employer’s correspondence, maxing out your HSA contributions, putting money in a Roth account and reaching your 401 (k) contribution limit, go ahead and invest through a traditional IRA or a brokerage taxable account. Traditional IRAs offer some tax incentives, and while you don’t get any tax-related benefits from a regular taxable brokerage account, you have the flexibility to use that money whenever and however you want.
One step at a time
In reality, you probably don’t have $ 25,000 or $ 30,000 to save for retirement each year. Don’t be discouraged by this. You can still build a portfolio enough to finance a comfortable retirement. For now, set a goal to contribute at least enough to your 401 (k) to earn your full employer. So, as your revenue increases, branch and diversify your contributions across different accounts. This should put you on the right path to the retirement you want.