Get your savings back on track

The pandemic has hindered many workers’ ability to save for retirement.

Layoffs, furloughs and reduced hours forced millions of workers to reduce contributions to their 401(k)s and other savings accounts or take withdrawals to pay the bills. Others who managed to keep their jobs tapped their savings to help family members.

To get your savings back on track, start by repairing any damage. If you took a coronavirus-related hardship withdrawal from your 401(k) or other tax-advantaged retirement plan, the Coronavirus Aid, Relief and Economic Security (CARES) Act gives you up to three years to repay the funds you withdrew, as long as your employer allows it. The repayment will be treated as a tax-free rollover. (If you repay the distribution after you’ve paid taxes on it, you can file an amended return and get a refund.)

Similarly, if you took a loan from your 401(k) plan last year, resolve to repay it as soon as your finances allow. While the CARES Act gives you six years instead of five to repay a 401(k) loan, replacing the funds you borrowed as soon as possible will pay off over the long term.

During the pandemic, many Americans who managed to keep their jobs saved more than ever. However, a lot of that money is in low-interest (or no-interest) bank savings accounts. Improve your wealth-building chops by using some of that money to increase contributions to your retirement savings plans. In 2021, you can save up to $19,500 in a 401(k) or similar workplace plan, or $26,000 if you’re 50 or older.

There are other strategies to boost your retirement nest egg that will also lower your taxes in retirement. In 2021, you can invest up to $6,000 ($7,000 if you’re 50 or older) in a Roth IRA, as long as you meet income thresholds. Withdrawals from a Roth are tax-free as long as you’re 59 ½ and have owned the account for at least five years.

If your employer offers a Roth 401(k) plan, divert at least a portion of your contribution to that account. Contributions to a Roth 401(k) won’t reduce your taxes now, but as is the case with a traditional Roth, withdrawals will be tax-free when you retire. There are no income limits on Roth 401(k) plans.

If you have an eligible high-deductible health insurance plan, you can fund a health savings account. Contributions are pretax (or tax-deductible, if your HSA is not employer-sponsored), the funds grow tax-deferred in the account, and withdrawals are tax-free for qualified medical expenses, without a time limit. If you don’t use the money for out-of-pocket expenses while you’re working, you can take tax-free withdrawals to pay for medical expenses after you retire.

In 2021, you can contribute up to $3,600 if you have self-only coverage or up to $7,200 for family coverage. If you’re 55 or older by the end of the year, you can put in an extra $1,000 in catch-up contributions.

DREAMSTIME