If you're committed to becoming a financially secure senior, you can take advantage of accounts created to make saving easier by providing you with generous tax breaks. In fact, there are three key retirement accounts you can use to amass a substantial nest egg with a little help from the government.
Your 401(k) plan
Around three-fourths of employers in the U.S. offered access to a 401(k) plan to workers in 2016, while those who are self-employed can open a one-participant 401(k) as long as they have no employees other than their spouse. If you have access to a 401(k) at work, or can open one yourself, you can contribute up to $18,000 tax-free in 2017. If you're 50 or older, catch-up contributions allow you to bump this contribution to $24,000.
Because a 401(k) allows you to invest with pre-tax funds, your $18,000 contribution will net you a $5,400 discount on your taxes if you are in the 30% tax bracket, so your contribution would only reduce your take-home pay by $12,600. Many employers match a percentage of contributions, so if you were earning $80,000 and your employer matched 6% of your salary, your employer would provide another $4,800 in essentially free money. You'd take home $12,600 less but would put $22,800 into retirement savings each year.
An Individual Retirement Account (IRA) also gives you tax breaks for saving for your future, and you don't need an employer to create one. Depending upon your income, you can contribute up to $5,500 with pre-tax funds to an IRA if you're under 50, and up to $6,500 if you're over 50, as of 2017. If you're in the 30% tax bracket, you'd save $1,650 on your taxes by maxing out your IRA, so your annual contribution would cost you just $3,850.
Health Savings Accounts (HSAs) allow you to invest with pre-tax funds, provided you have a "high-deductible" health plan, which most plans are these days. As of 2017, your plan must have an individual deductible of at least $1,300 or a family deductible of $3,600. You're allowed to invest as much as $3,400 per person and $6,750 per family, with people 55 and up entitled to an additional $1,000 catch-up contribution. If you're in the 30% tax bracket and you max out your $3,400 contribution, you'll get a $1020 tax break and reduce your take-home pay by $2,380 to make your maximum contribution. If you begin saving later, at age 45, you'll have around $149,141 by age 65. The money from your HSA can then be withdrawn tax free to pay for out-of-pocket healthcare expenditures.
While it may seem like a lot to invest in all three of these tax-advantaged accounts, this is an opportunity to have the government subsidize your savings. Even if you can't quite max them all out, contributing cash to each could still leave you in very good shape when retirement arrives. For more strategies on how to prepare for your best retirement, give us a call at Penny Lane Financial.