4 Smart Ways To Save No Matter What Congress Does To 401(k)s
Worried that Congress still might change the rules on how much you can stash away pretax in your 401(k) workplace retirement plan? Stop worrying and start saving. “Put away as much as you can, wherever you can,” says Ed Slott, a CPA and retirement plan expert based in Rockville Centre, N.Y. “You want to get the benefit of the tax shelter.”
For most retirement savers, that means a pretax 401(k) and a Roth IRA. “There’s a pecking order,” Slott says. First, contribute enough to your 401(k) to get any employer match. Then fill up a Roth IRA. And then go back and put more into your 401(k).
If your employer offers a Roth 401(k) option, go Roth— you’ll get less in your paycheck, but you’re building a tax-free retirement kitty. You can stash $18,000 a year, or $24,000 if you’re 50 or older for 2017 in a 401(k); $18,500, or $24,500 for 2018. One-third of 401(k) savers with income of more than $100,000 contributed the maximum allowed last year, according to Vanguard’s How America Saves 2017. Sixty-five percent of Vanguard-administered plans offer the Roth option, and 13% of employees in those plans contribute on a Roth basis.
Are you a high earner able to save more than allowed in your 401(k)? A Millennial? A side gigger? One of these options could be for you.
A Roth IRA.
Put up to $5,500 a year in a Roth IRA, or $6,500 if you’re 50 or older. Contributions aren’t tax deductible, but all withdrawals in retirement are tax free. Plus, you can take back your contributions at any time without taxes or penalty—flexibility millennials may need. “I look at a Roth IRA as tax insurance,” Slott says. “Once you pay in, you’re protected against future tax hikes.”
A nondeductible IRA.
Contribute to this tax-deferred account if you’ve maxed out your 401(k) and earn too much to open a Roth. Hold taxable bonds in it, or convert it to a Roth IRA. With a Roth conversion, you turn the IRA into a Roth IRA (where it grows tax-free, instead of tax-deferred). Keep in mind that if you don’t have a 401(k) plan option and aren’t an active participant in an employer retirement plan, a contribution to a traditional IRA remains deductible even if
you’re high income, notes financial planner Michael Kitces.
Make pre-tax contributions to a SEP-IRA from your side-gig self-employment earnings—it won’t reduce what you can contribute to your 401(k) or to a Roth or nondeductible IRA.
An HSA is a triple-tax-advantaged account that can supplement your retirement nest egg. The catch: you must have a high-deductible health insurance plan to open one. You can put up to $3,400 for an individual ($6,750 for a family) pre-tax for 2017. It grows tax-free, and withdrawals for medical expenses—including in retirement—are tax free. Note you must affirmatively elect to invest your money. If your workplace HSA is a loser, you can transfer funds to an outside HSA with lower costs and a better investment line-up.
What about a brokerage account? That’s a form of aftertax money, but it’s not sheltered, so income is taxable. It’s good to have some money there for easy access and tax diversification. The account doesn’t have to scream “retirement” for it to help you get there. FW