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.
- Make the most of your retirement planning by taking advantage of employer-sponsored plans and company matches.
- Consider claiming double plan contributions or a retirement savings tax credit of your plan contribution.
- Increase your savings through a backdoor Roth IRA.
- You may save more if you move to a state with no state taxes.
- Think about opening both a self-employment savings account and a health savings account.
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. 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.
Here's an example to show how it works. Let’s say José earns $50,000 per year. His company contributes up to 5% of his salary, matching every dollar he puts into his workplace retirement account. 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. If José doesn’t add his 5% to the pool, he misses out on free money.
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, due to certain catch-up provisions. These provisions apply to certain 457(b) and 403(b) plan participants. Details are provided on the Internal Revenue Service (IRS) website.
These workers can add $19,500, the maximum amount for 2021 (or $20,500 in 2022), to 403(b) or 457 retirement plan accounts.
3. File for Uncle Sam’s Retirement Savings Credit
If you are a lower- or middle-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 an adjusted gross income (AGI) of below $68,000 for 2022 ($66,000 for 2021), and you contribute to a qualified retirement plan, you may be eligible for a tax credit.
The income limits for heads of household is $51,000 for 2022 ($49,500 for 2021) and for single filers and married persons filing separately is $34,000 for 2022 ($33,000 for 2021).
The maximum credit for 2021 and 2022 is $2,000 for married couples filing jointly and $1,000 for single filers (applied against the maximum contribution amounts: $4,000 for married couples filing jointly and $2,000 for single filers).
4. Use the Backdoor Roth IRA to Increase Savings
For 2022, the AGI phase-out contribution range for Roth IRAs for married couples filing jointly is $204,000 to $214,000 ($198,000 to $208,000 for 2021) and for single taxpayers and heads of households is $129,000 to $144,000 ($125,000 to $140,000 for 2021).
If your current income is too high and makes you ineligible 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, although there is a limit to what can be contributed.
The IRS caps the contribution limit to $6,000 (for 2021 and 2022) or $7,000 if you are 50 or over, or the taxpayer's total taxable compensation if it was less than the stated dollar amounts.
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.
“I have high-income clients who open traditional IRAs and make non-deductible contributions on an automatic monthly basis to the maximum allowable amount," says Alyssa Marks, lead advisor at Trifecta Financial.
Marks adds the following:
"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 quarterly, 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."
5. Retire in the Right State
Alaska, Florida, South Dakota, Wyoming, Texas, Nevada, and Washington all boast the fact that they have no state income taxes. Be aware that New Hampshire and Tennessee don't tax earned income, but they 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 Retirement Savings
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 $61,000 in 2022 ($58,000 in 2021) with a SEP. If you’re under age 50, you can invest up to $20,500 in 2022 ($19,500 in 2021) in a Solo 401(k) in the role of employee.
The catch-up contribution for employees age 50 or older is $6,500 in 2022 (unchanged from 2021). There’s also an opportunity to contribute more to the solo 401(k) in the role of the employer.
7. The Health Savings Account (HSA)
With healthcare costs growing and the proliferation of high-deductible health plans (HDHP), the health savings account (HSA) is a golden retirement planning opportunity. This tool can not only be used to pay for healthcare expenses but can also be used to squirrel away additional funds for retirement.
The individual or employer contributes up to $7,300 for a family or $3,650 for an individual in 2022. The contributions are 100% tax-deductible, and funds unused for medical expenses may continue to be invested and grow over time. Not only that, but distributions made on qualified medical expenses are tax-exempt. Those over age 55 can sock away an additional $1,000 per year.
Remember, a traditional IRA is funded with pre-tax dollars whereas a Roth IRA is funded with after-tax dollars. Choose the one that works best for your tax situation.
“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," says Robert M. Troyano, CPA, CFP, founder and managing partner at RMT Wealth Management. "These accounts should be funded to the maximum since participants are almost certain to have some out-of-pocket medical expenses currently or in the future."
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, 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 to $7,000 for 2021 and 2022.
Finally, the government rewards you with the opportunity to contribute an additional $6,500 to the employer-sponsored retirement plan (e.g., 401(k), 403(b), 457) for a maximum amount of $27,000 in 2022 ($26,000 in 2021).
How Much Money Should I Save for Retirement?
The amount of money that you should save for retirement varies depending on many factors, such as your health, your current lifestyle, your lifestyle in retirement, and any obligations you may have. In general, experts suggest that your monthly income in retirement should be between 70% to 80% of your last job's income.
How Much Can I Contribute to My 401(k) Plan?
You can contribute up to $19,500 to your 401(k) plan in 2021. This amount increases to $20,500 in 2022. If you are aged 50 or older, you can contribute an additional $6,500 in both years.
What Are the IRA Contribution Limits?
The contribution limit for both a traditional IRA and a Roth IRA is $6,000 in 2021 and 2022. If you are aged 50 or older, you can contribute an additional $1,000.
The Bottom Line
Automate your retirement savings and have the money transferred from your paycheck to any and all of your retirement accounts. 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.