Whether your retirement date is fast approaching or you still have a few years to go, it’s important to take steps to boost your nest egg so you’re better prepared to meet your goals. Consider the following five strategies for maximizing your savings potential.
1. Maximize tax-advantaged contributions
Get the most out of your savings by maximizing tax-deferred contributions to your IRAs and 401(k) plans. In 2023, you and your employer can contribute up to a total of $66,000 to your traditional 401(k).1 If you don’t have a 401(k) or want to save more, you can contribute $6,500 to an IRA.2
2. Take advantage of catch-up contributions
If you are over age 50, you can exceed the standard annual contribution limits of your IRA and 401(k) accounts. This allows investors close to retirement to supercharge their savings, putting away more tax-deferred funds for the future. In 2023, you can use catch-up contributions to put away an additional $1,000 in your IRA and an additional $7,500 in your 401(k).3
3. Explore your HSA investment options
If you have a high-deductible insurance plan you can use an HSA to set aside pre-tax funds to spend tax-free on deductibles, co-pays, and other qualified medical expenses either now or in the future. If you’re single, you can deposit up to $3,850 each year into your HSA, and up to $7,750 for family coverage for your spouse and/or children.4
HSA account holders can invest the funds in stocks, bonds, mutual funds, or ETFs, but only a small fraction take advantage of this option. According to a study by the Employee Benefit Research Institute, only 9% of HSA account holders currently invest their funds—everyone else is keeping their HSAs in cash.5
Investing allows your HSA funds to potentially grow over time. That can provide extra funds for health care costs now, and, after age 65, you can make taxable withdrawals from your HSA for any reason without penalty. Explore your HSA investment options with your financial advisor to maximize the potential of your HSA funds after you’re no longer working.
4. Consider a Roth conversion
You may be able to roll over funds from your traditional 401(k) account to a Roth IRA to provide a bucket of tax-free income you can draw from when you retire. Contributions to 401(k)s are made pre-tax, so when you roll the funds over to a Roth, you’ll have to pay taxes on them. From there, they can grow tax-free, and you won’t pay taxes on them when you make withdrawals.
This maneuver can be tricky. In part, that’s because Roth IRA contributions are limited by how much you make. You can only contribute the maximum if your modified adjusted gross income (MAGI) is less than $138,000 ($218,000 if you’re married filing jointly). Beyond this income threshold, your contribution limit is decreased until it phases out entirely at $153,000 for single filers, or $228,000 for joint filers.6
5. Assess your annuity options
If you still have retirement money to invest after you’ve maximized your 401(k) and IRA options, an annuity may be suitable. An annuity is an insurance product that you can purchase with a lump sum of cash or a series of payments. Depending on the specific annuity, you may be able to access market upside while also guaranteeing a level of income in retirement.
You have a range of options for maximizing your savings and retirement income. We realize everyone’s situation is unique, so if you have any questions or concerns about your situation, please don’t hesitate to reach out. Let’s make sure your money will serve you well in retirement.
1 “Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits,” IRS.gov, 25 October 2022, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
2“401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500,” IRS.gov, 15 March 2023, https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500
3“Retirement Topics – Catch-Up Contributions,” IRS.gov, 26 October 2022, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions
4“Publication 969 (2022), Health Savings Accounts and Other Tax-Favored Health Plans,” IRS.gov, 1 February 2023, https://www.irs.gov/publications/p969
5“Publication 969 (2022), Health Savings Accounts and Other Tax-Favored Health Plans,” IRS.gov, 1 February 2023, https://www.irs.gov/publications/p969
6“Amount of Roth IRA Contributions That You Can Make For 2023,” IRS.gov, 15 March 2023, https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2023
HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Most states recognize HSA funds as tax-free with very few exceptions but please consult a tax advisor regarding your state’s specific rules. Investments available to HSA holders are subject to risk, including the possible loss of the principal invested and are not federally insured or guaranteed, HSA holders making investments should review the applicable fund’s prospectus. Investment options and thresholds may vary and are subject to change. Consult your advisor or the IRS with any questions regarding investments or on filing your tax returns. Before making any investments, review the fund’s prospectus.
Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.
A fixed annuity is a long-term, tax-deferred insurance contract designed for retirement. It allows you to create a fixed stream of income through a process called annuitization and also provides a fixed rate of return based on the terms of the contract. Fixed annuities have limitations. If you decide to take your money out early, you may face fees called surrender charges. Plus, if you’re not yet 59 ½, you may also have to pay an additional 10% tax penalty on top of ordinary income taxes. You should also know that a fixed annuity contains guarantees and protections that are subject to the issuing insurance company’s ability to pay for them.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisorys of RJFS, we are not qualified to render advise on tax or legal matters. Your should discuss tax or legal matters with the appropriate professional.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
This information has been obtained from sources considered to be reliable, but we do not guarantee that the forgoing material is accurate or complete. You should discuss any legal matters with the appropriate professional.
This information was developed by the Oechsli Institute, an independent third party. The opinions of the Oechsli Institute are independent from and not necessarily those of RJFS or Raymond James.