Are you planning to retire in the next few years? It’s still not too late to make a difference in how much you’ll have available for retirement. And because you’re likely at a high point in your earnings, you’re well-positioned to help yourself. Consider putting these six strategies to work:
- Catch-up contributions. In addition to possibly having higher earnings, you may have another advantage regarding retirement savings – you can make “catch-up” contributions to your tax-deferred retirement accounts, thereby allowing you to exceed the limits. If you’re 50 or older, you can put in an extra $1,000 a year to your Individual Retirement Account (IRA) above the $6,000 limit; for a 401(k), you can surpass the $20,500 limit by $6,500, for a maximum contribution of $27,000 in 2022.
- After-tax contributions. What if you’re already “maxing out” on your 401(k), even with your catch-up contribution, and you can still afford to put more into your plan? Are you out of luck? Not necessarily – your employer might allow you to make “after-tax” contributions. In 2022, the IRS allows you to put in $61,000 (or $67,500 if you’re 50 or older) to your 401(k), an amount that includes your pretax contributions, your after-tax contributions, and any contributions from your employer. Your after-tax contributions, like the rest of your 401(k), can grow on a tax-deferred basis, and you’ll pay taxes on the earnings when you start taking withdrawals.
- Roth conversions. If your plan allows it, you may be able to convert your after-tax 401(k) dollars to Roth dollars through an in-plan conversion or a rollover to a Roth IRA. You won’t owe taxes on the after-tax contributions because you already paid taxes when you contributed the money, but any earnings on the after-tax contributions will be subject to taxes. The benefit, though, is that future earnings will grow tax-free.
- Backdoor Roth IRA. If your earnings exceed the Roth IRA limits, you can create what’s known as a “backdoor Roth IRA.” This isn’t an official type of IRA, but rather a strategy for taking advantage of the benefits offered by a Roth IRA, such as the potential for tax-free earnings, no mandatory withdrawals (RMDs), and greater flexibility in managing your taxes in retirement. To create this backdoor arrangement, you make nondeductible (after-tax) contributions to a traditional IRA and then convert your contributions to a Roth IRA. Since the contribution is after-tax, you won’t pay additional taxes on the conversion of the contribution; however, any earnings on the contribution will be subject to taxes.
- Health Savings Account (HSA). Once you retire, healthcare will likely be one of your largest expenses – so, if you have a health savings account (HSA) available through a high-deductible health plan, you may want to take advantage of it. In 2022, you can put up to $3,650 in an HSA, if you’re single, or $7,300 for family coverage. You contribute pretax dollars to your HSA, your earnings grow tax-free, and your withdrawals are tax-free, provided they’re used for qualified medical expenses, creating the potential for triple tax savings.
- Annuity. Even if you’ve contributed the maximum amounts to your IRA and 401(k), including after-tax contributions, you may still have income you’d like to invest for retirement. Consider purchasing a nonqualified annuity, which can be structured to help provide you with a lifetime income stream. Annuities offer tax-deferred growth potential – you won’t pay taxes until you start taking withdrawals.
Need retirement planning guidance? Our network of advisors can help you determine which options are best for you.