Telling someone they need to save for retirement is stating the obvious. The problem is most people want to do it as efficiently as possible. There is no universal strategy for planning for retirement, but there are good practices that can make the journey a lot smoother.
Regardless of your age, it's never too early to begin financially planning for retirement. Here are three retirement savings hacks you'll be glad you used.
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1. Use a Roth IRA if you're eligible
There are two main types of IRAs: traditional and Roth. A traditional IRA is similar to a 401(k) because you contribute pre-tax dollars (if you're eligible for the deduction) and then pay taxes on withdrawals in retirement. A Roth IRA is the opposite. You contribute after-tax dollars and then take tax-free withdrawals in retirement.
To be eligible for tax-free withdrawals, you need to be 59 1/2 years old and have had your account for at least five years. Tax-free withdrawals are one of the better gifts from Uncle Sam because it could easily save you thousands in retirement.
Most people will fall within the 15% or 20% capital gains tax rate range, so a Roth IRA could save $1,500 or $2,000 per $10,000 in capital gains. Imagine someone invests $500 monthly for 20 years averaging 8% annual returns. After 20 years, they'll have about $297,000, of which $177,000 would be capital gains. Using a Roth IRA could save them $26,550 or $35,400 in taxes owed, depending on which tax bracket they're in.
Roth IRAs have income limits to be eligible to contribute. In 2023, the most you can earn and still be eligible to contribute to a Roth IRA is $153,000 if you're single and $228,000 if you're married and filing jointly. Take advantage while you can because that might not always be the case.
2. Use your HSA as a supplemental retirement account
A health savings account (HSA) is an account available to people enrolled in a high-deductible health plan that allows you to contribute pre-tax money and take tax-free withdrawals for qualified medical expenses.
Although an HSA is intended for medical expenses, it can be used as a supplemental retirement account once you turn 65 years old. At that age, all withdrawals from an HSA are exempt from the usual 20% early withdrawal penalty.
You'll owe income taxes on any withdrawn amount not used for qualified medical expenses, but that's along the lines of how a 401(k) or traditional IRA works: You make pre-tax contributions and owe taxes on withdrawals in retirement.
Healthcare is one of the largest expenses people face in retirement, so you don't want to contribute to an HSA with the intention of ignoring its primary purpose. However, the flexibility can come in handy. It can give retirees quick access to funds as well as give workers who may have maxed out other retirement accounts a chance to stash more money away for retirement in a tax-friendly way.
The HSA contribution limit in 2023 is $3,850 if you have single-person coverage and $7,750 if you have family coverage. People 55 and older can add an additional $1,000 catch-up contribution.
3. Maximize your 401(k) employer match
One of the best features of a 401(k) plan is the employer match, if your company offers it. Typically, an employer match involves your company matching up to a specific percentage of your contributions. It varies by company, but it's often in the 3% to 5% range.
Of course, you're working for it, but an employer match is as close to "free" money as there is. When you're deciding how much to contribute to your 401(k), the absolute minimum should be the most your employer will match. Anything less is leaving money on the table.
Imagine someone makes $100,000 and their employer matches up to 5% of their contributions. Not only is that an extra $5,000 yearly, but it's also an extra $5,000 that can grow and compound to much more with time. For perspective, it takes an investment just over seven years to double if it averages 10% annual returns.
