According to most advice, it’s best to start saving for retirement as soon as possible. When it comes to retirement saving, you have many ways to do it. Your options are a traditional IRA (individual retirement account), a Roth IRA, a 401(k) plan, and an HSA (health savings account).
Although Social Security is a great retirement program, the benefits don’t go far enough for many retirees. Most retirees who depend on Social Security benefits struggle to afford food and pay rent when inflation drives the cost of products through the roof. With the rising cost of living, it’s important to save as much as you can for a comfortable life in retirement.
Why it's important to know the differences between traditional IRA, Roth IRA, 401(k), and HSA.
A traditional IRA, Roth IRA, and 401(k) are retirement savings plans. HSA is method for saving for medical expenses, but you can take advantage of it to increase your retirement savings.
When it comes to choosing the best retirement savings plan, many people struggle to make a decision. Others are at loss about how HSA can fit in their retirement savings plan. Let’s go over each of these plans to see how they work and how you can leverage different plans to maximize savings for your senior years.
Everything you need to know about a traditional IRA.
In a traditional IRA, you’re allowed to make pre-tax contributions from your paycheck to a retirement account. You can contribute a maximum of $6,000 into an IRA in 2022. People who are more than 50 years old are allowed to put in an extra $1,000. So, they can save up to $7,000 in 2022.
The money grows as long as it stays in the account and you only pay taxes when you’re making a withdrawal. A traditional IRA is ideal for retirement savers who expect their tax rate to be lower when they start taking withdrawals.
Is a Roth IRA right for you?
In a Roth IRA, you make after-tax contributions. You can put a maximum of $6,000 into a Roth IRA in 2022. Contributors over 50 years old can put in a maximum of $7,000. Roth IRA savers enjoy tax-free withdrawals. While a traditional IRA is open to people of all earning levels, the eligibility for a Roth IRA requires earnings below a certain level. If you expect your tax rate to be higher when you start taking withdrawals, a Roth IRA would be a great fit for you.
How a 401(k) plan works and how to get the most out of it.
A 401(k) is a retirement savings plan that's named after the tax code that established it. If you work for a company, it might offer a 401(k). Under this plan, you make a pre-tax contribution to a company-sponsored pension fund. The company might match your contribution. In 2022, you can contribute $20,500 to a 401(k) plan or $27,000 if you’re over 50 years. The money you put into the plan gets invested so it grows over time. You pay taxes when taking withdrawals.
Should you include an HSA in your retirement savings plan?
Some companies offer an HSA to their employees. However, you can also open an HSA yourself if you have a qualifying health plan. With an HSA, you set aside a portion of your paycheck into a special savings account. In 2022, an individual can contribute up to $3,650 and a family can contribute up to $7,300. Contributors who are over 55 years old can put in an extra $1,000.
You don’t have to pay taxes on HSA withdrawals if you use the money to cover medical bills. Although an HSA is designed to cover medical expenses, the company grows over time and you’re allowed to make nonmedical withdrawals. Therefore, an HSA can supplement your retirement plan.
Finally, many people are eligible to use all these retirement savings plans. If your company offers a 401(k) and matches it, you should take that up first. After you max out the 401(k), you can contribute to the other plans.