Regardless of whether you're 25 or 55, saving for retirement is a wise financial strategy. Everyone will face retirement at some point, either by choice or necessity. Whether you are on track for retirement savings or need to play catch up, or you're a financial advisor who wants to give clients a leg up on preparing for their later years, these eight essential tips for retirement savings will put more money in your account. (Also see our tutorial: Retirement Planning Basics.)
1. Grab the 401(k) or 403(b) company match.
If your workplace offers a retirement plan and a company match, you should contribute up to the amount that the company kicks in. Let’s say that José’s company contributes up to 5% of his salary and matches every dollar he puts into his workplace retirement account. If José doesn’t add his 5% to the pool he misses out on free money. José earns $50,000 per year. By investing at least $2,500 into his 401(k), he automatically gets a $2,500 bonus from his employer, along with important tax benefits.
For the greatest retirement benefit, contribute up to the maximum amount allowed by law to your retirement savings plans. Start now for the greatest financial benefit.
2. Claim double retirement plan contributions.
A little known retirement savings opportunity allows some teachers, healthcare workers, public sector and nonprofit employees the opportunity to contribute twice as much to retirement plans. These workers can add $18,000, the maximum amount (in 2016) to a 403(b) and up to $18,000 to a 457 retirement plan. That’s a total tax advantaged savings amount of $36,000 in one year. (For more, see: 5 Essential Retirement Savings Accounts.)
3. File for Uncle Sam’s retirement savings credit.
If you are a middle- or lower-income taxpayer, you may claim a tax credit for up to 50% of your retirement plan contribution. If you are married and filing jointly with adjusted gross income of $61,500 or less (in 2016), and you contribute to a qualified retirement plan, you may be eligible for a tax credit.
The maximum credit amount per couple is $4,000 and $2,000 for an individual, depending upon your contribution amount and income. (For related reading, see: Saver's Tax Credit: A Retirement Savings Incentive.)
4. Use the back door Roth IRA as a way to increase retirement savings.
If your current income is too high and makes you ineligible (for 2016: married filing jointly - $194,000; single - $132,000) to contribute to a Roth IRA, there’s another way in. First, contribute to a traditional IRA. There is no income ceiling for contributions to a non-deductible traditional IRA. After the funds clear, convert the traditional IRA to a Roth IRA. That way the funds can compound for the future and be withdrawn tax free, as long as you meet the withdrawal guidelines. (For more, see: How Can I Fund a Roth IRA if My Income is Too High?)
“I have high-income clients who open traditional IRAs and make non-deductible contributions on an automatic monthly basis to the maximum allowable amount ($5,500, or $6,500 for those age 50-plus). At the end of each quarter, we submit a full conversion request so that the entire IRA balance gets converted to their Roth account. By converting on a quarterly basis, there is not a lot of time for taxable gains to accrue in the traditional IRA. So the tax implication of the conversion is minimal for the client. And, they’re saving additional retirement dollars to compound and withdraw tax-free later on,” says Alyssa Marks, lead advisor, CMFS Group, Inc., Morton, Ill.
5. Retire in the right state.
Florida, Tennessee, South Dakota, Wyoming, Texas, Nevada and Washington: These states boast “no state income taxes.” Be aware that New Hampshire and Tennessee do tax dividends and interest. Fortunately for retirees, most states don’t tax Social Security. Before packing up and moving, evaluate all of the taxes in your proposed new home state.
6. Self-employed? Take advantage of available retirement savings vehicles.
Even if it’s just a side job, self-employment income allows you to contribute to a solo 401(k) and a Simplified Employee Pension (SEP) plan. You can contribute up to 25% of your net self-employment income, up to $53,000 (the 2016 limit; in 2017, it’s $54,000) with a SEP. If you’re under age 50, you can invest up to $18,000 (2016) in a Solo 401(k) in the role of employee. There’s also an opportunity to contribute more to the solo 401(k) in the role of the employer.
7. Don’t overlook the health savings account.
With healthcare costs growing and the proliferation of high deductible health plans, the health savings account (HSA) is a golden retirement planning opportunity. This tool can not only be used to pay for health care expenses, but also to squirrel away additional funds for retirement. The individual or employer contributes up to $6,750 for a family or $3,350 for an individual. The contributions are 100% tax deductible, and funds unused for medical expenses may continue to be invested and grow over time. Those over age 55 can sock away an additional $1,000 per year. (For more, see: Pros and Cons of a Health Savings Account.)
“Health savings accounts are the only savings vehicle that is tax deductible on the way in and potentially tax-free on the withdrawal if used for qualified medical expenses. These accounts should absolutely be funded to the maximum since participants are almost certain to have some out-of-pocket medical expenses currently or in the future,” says Robert M. Troyano, CPA, CFP®, founder and managing partner at RMT Wealth Management in Saddle Brook, N.J.
What’s more, “once you reach age 65, any assets inside the HSA account may potentially be used for anything, not just healthcare-related expenses,” says Mark Hebner, founder and president of Index Fund Advisors, Inc., in Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors.”
8. Benefit from getting older.
If you’re over age 50, the tax system is your friend. Retirement plan contribution limits are raised, giving the older investor a chance to accelerate their retirement savings. You’re allowed to increase contributions to both traditional and Roth IRAs by $1,000 for a total 2016 amount of $6,500. (For more, see: 6 Retirement Savings Tips for Those Aged 45 to 54.)
Finally, your government rewards you with the opportunity to contribute an additional $6,000 to the employer-sponsored retirement plan for a maximum amount of $24,000.
The Bottom Line
Automate your retirement savings and have the money transferred from your paycheck to the retirement account(s). The cash you can’t get your hands on is more money for your retirement nest egg. Take advantage of the tax saving retirement opportunities for which you qualify. By starting now and maximizing your retirement account dollars, you secure your financial future. (For a list of retirement savings tips from the Internal Revenue Service, click here.)