Making the most of every dollar is crucial to your financial well-being. What better way to do that than through retirement savings? You not only save more for retirement, but you could save taxes to boot! From that point on, that money grows in a tax-deferred account where it can compound faster, and you don’t have to pay tax on the investment earnings – saving you more taxes!
Employer Retirement Plan
If your employer offers a retirement plan that allows you to make pre-tax contributions, contribute as much as you can afford to contribute. When possible, contribute at least as much as you would need to maximize any employer matching contribution. It’s free money! And remember, your paycheck won’t go down dollar-for-dollar by the amount you contribute because your income tax withholdings will also go down to help offset the contribution. So…maybe you can afford to contribute a little more.
If the employer offers a:
- 401(k), 403(b) or a governmental 457 deferred comp plan—your 2022 pre-tax contribution can be up to $20,500 or $27,000 if you’re age 50 or over.
- SIMPLE IRA plan—your 2022 pre-tax contribution can be up to $14,000 or $17,000 if you’re age 50 or over
Individual Retirement Account
Whether your employer offers a retirement plan or not, you can still contribute up to the lesser of your earned income or $6,000 ($7,000 if you’re age 50+) to an IRA. You can make a spousal IRA contribution even if your spouse doesn’t have earned income, as long as you have enough earned income to cover both of your contributions.
It just becomes a question of whether you can deduct the contribution for you and your spouse.
Even if you can’t deduct the contribution, future earnings will be tax-deferred so you avoid having to report that investment income on your tax return. That saves you more taxes going forward. If you can’t deduct a contribution and your income is low enough to contribute directly to a Roth IRA, then contribute to a Roth IRA so at least it can grow tax-free.
IRA deduction:
- If you or your spouse are not active participants in an employer retirement plan, your IRA contribution is fully deductible.
- If you are an active participant in an employer retirement plan, your IRA deduction phases out for AGI of $68k-$78k (Single) or $109k-$129k (Married filing joint) and is fully phased out for AGI over those ranges.
- If you are not an active participant in an employer retirement plan but your spouse is, your IRA deduction phases out for AGI of $204k-$214k and is fully phased out for AGI over $214k.
Backdoor Roth IRA
If your income is too high to contribute directly to a Roth IRA and you have no other pre-tax IRA, SIMPLE IRA or SEP IRA balances, you can convert a nondeductible IRA contribution to a Roth IRA by doing a backdoor Roth IRA. That being said, last year’s tax proposal was going to do away with that strategy. However, since that bill hasn’t come to anything, you can still do a backdoor Roth IRA for 2021 and 2022 IRA contributions, just be sure to do it as soon as you can (and at least by 4/15/22 for a 2021 IRA contribution).
Health Savings Account
A Health Savings Account (HSA) can be another valuable retirement savings vehicle. If you qualify (you’re covered under a high-deductible health plan (HDHP)), you can contribute to an HSA on a pre-tax basis. You not only save tax on the contribution, but you’re not taxed on the earnings as it grows, and it can come out tax-free when used to pay for qualified medical expenses. There’s nothing else I can think of that is triple tax-free! It’s even more powerful than an employer retirement plan due to its taxable distributions.
This becomes a valuable retirement savings vehicle if you can afford to pay for current medical expenses out-of-pocket and leave the HSA account to accumulate. Most plans let you invest the funds. The HSA can be used tax-free later to pay for medical expenses in retirement. If there’s an unforeseen cash crunch and you need to withdraw funds sooner, you can still reimburse yourself at any time for any unreimbursed expenses you incurred since having the account. Just hold on to your unreimbursed medical receipts.
The 2022 contribution limits are $3,650 for single HDHP coverage or $7,300 for family coverage. If you’re age 55 or over, you can contribute an additional $1,000.
Retirement might be just around the corner or off in the distant future. Either way, it’s never too late to do the most you can. Maybe these strategies will help you get there in a better financial position.
If you have any questions on the contents of this article, please do not hesitate to reach out to our trusted experts to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.