On Thanksgiving, we're often encouraged to pause between turkey bites and express our gratitude for the things that matter to us the most -- family, health, and, ideally, financial stability. But it also wouldn't hurt to take a moment and acknowledge the retirement savings tools that have the potential to help millions of people build wealth and secure their futures. Here are three particularly important ones.
The beauty of IRAs is that anyone with earned income can contribute to one. Right now, IRAs max out at $6,000 a year for workers under 50 and $7,000 a year for those 50 and over. They also come in two main varieties -- traditional and Roth -- each of which offer their own distinct benefits.
Traditional IRAs give you a tax break on the money you contribute. Put in $6,000 this year, and that's $6,000 in earnings the IRS won't tax you on. Plus, unlike investments in a traditional brokerage account, you won't be subject to capital gains taxes every year in your IRA. Rather, your investments get to grow on a tax-deferred basis until you start taking withdrawals.
Roth IRAs, meanwhile, offer the benefit of tax-free growth. Withdrawals are also completely tax-free in retirement.
The great thing about 401(k) plans is that they come with generous contribution limits. This year, 401(k)s max out at $19,500 for workers under 50 and $26,000 for those 50 and over. Next year, these limits will increase by $1,000, respectively.
Furthermore, many of the companies that sponsor 401(k)s also match employee contributions to some degree. It could be the case that by putting in $3,000 from your own paychecks, your employer kicks in another $3,000 to your account. And, saving in a 401(k) is easy. You can change your contribution level at any time and your payroll department will have that sum deducted from your earnings automatically.
3. Health savings accounts
HSAs aren't a retirement savings account per se -- but they can certainly function as one. With an HSA, you contribute money to cover near-term or far-off healthcare expenses. The funds in your account never expire, so if you don't use them up during your working years, you can access them during your senior years.
In fact, it pays to intentionally not dip into your HSA while you're working and let that money grow, since unused HSA funds can be invested. And from a tax standpoint, HSAs offer more benefits than IRAs or 401(k)s. That's because they're triple tax-advantaged -- contributions are tax-free, investment gains are tax-free, and withdrawals used for medical expenses are tax-free.
Another great thing about HSAs is that once you turn 65, you can remove funds from your HSA for any reason and not get penalized. You'll pay taxes on your withdrawals in this case, but that's really no different than paying taxes for withdrawing money from a traditional IRA or 401(k).
HSA eligibility hinges on having a high-deductible health insurance plan. This year, HSAs max out at $3,600 for individuals and $7,200 for families. Next year's limits will rise to $3,650 and $7,300, respectively. However, workers 55 and over can put in an extra $1,000 on top of whichever limit applies to them.
Give thanks for a variety of savings options
Whether you opt to save for your senior years in an IRA, 401(k), HSA, or a combination of these plans, it pays to express some gratitude for the fact that they exist and are loaded with different tax breaks. If it weren't for these plans, a lot of us might have a much harder time building wealth for the future.