Amidst all the things to be thankful for this Thanksgiving, there was one thing you probably didn’t consider. That’s the IRS announcement of higher contribution limits for retirement accounts next year.
While in an ideal world, we’d be able to max them all out, that may not always be feasible. Here is a guideline to how you may want to prioritize them:
1. Roth IRA
2019 limit is $6,000 if you meet the income limits plus another $1,000 if you’re over age 50
Financial planners typically recommend that you prioritize building an emergency fund over other forms of saving. One thing that’s unique about the Roth IRA is that you can withdraw your contributions at any time without tax or penalty so you can use it as part of your emergency fund. (You may have to pay taxes plus a 10% penalty on any earnings you withdraw before 5 years and age 59 ½, but the contributions come out first.) Just be sure to keep any emergency Roth money in something safe like a savings account or money market fund until you’ve built up enough emergency funds someplace else. At that point, you can invest the Roth money more aggressively for retirement.
2. Match in your employer’s retirement plan
2019 limit for 401(k), 403(b), TSP, and most 457 plans is $19,000 plus $6,000 if you’re over age 50
It’s hard to beat a guaranteed 50% or 100% return on your money. Try to contribute at least enough to maximize the match from your employer. Otherwise, you’re leaving free money on the table. You also get the convenience of payroll deduction, tax-deferred or tax-free growth, access to potentially lower cost funds, and creditor and estate planning protections.
2019 limit: $3,500 for individual coverage and $7,000 for family coverage plus $1,000 if age 55 or older
If you’re enrolled in an HSA-eligible high-deductible health insurance plan, you might want to max out an HSA next. That’s because you can both make pre-tax contributions and withdraw the money tax-free for qualified health care expenses. No other account has the same level of tax benefits. You have to pay taxes plus a 20% penalty on non-qualified withdrawals, but you can withdraw the money tax-free at age 65 for any purpose without penalty. (It’s also still tax-free for qualified medical expenses including some Medicare and long term care insurance premiums.)
You can use your HSA as a retirement account by not using it and allowing the money to grow tax-free for health care costs in retirement. Many HSA providers allow you to invest your HSA money for that reason, but don’t invest money you might need in the next 5 years. (If your HSA provider doesn’t allow for investing, you can transfer your account to a provider that does.) If you use non-HSA money to cover health care expenses, just be sure to keep the receipts because you can withdraw that money from your HSA tax-free at any time to reimburse yourself.
4. Traditional Pre-Tax or Roth Retirement Account
Once you’ve maxed out your HSA, consider contributing more to your employer’s retirement plan. (If you’re self-employed, you can open a small business retirement plan.) You can run a retirement calculator to see how much more you need to save to hit your goals or simply contribute as much as you can to maximize the tax benefits.
2019 limit is $6,000 for traditional IRAs plus $1,000 if you’re over age 50 and up to $47,000 (minus your employer’s contributions) to your employer’s retirement plan
On their own, after-tax contributions may not make sense since you’ll have to pay taxes on the earnings at your regular income tax rate when you withdraw them and that rate is higher than the capital gains tax you’d pay for investments held for more than a year. However, you can convert this money to a Roth account to grow tax-free for the longer of 5 years and age 59 ½. You’ll have to pay taxes on any earnings when you convert. This is often called a “backdoor Roth IRA” and can be complicated if you have any other pre-tax IRAs.
Of course, every situation is unique. If you’re not sure which account(s) to focus on for your particular situation, consider consulting with a qualified and unbiased financial planner. Your employer may even offer access to ones for free as part of a workplace financial wellness program. If so, that’s something to be thankful for as well!
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