What Retirement Accounts Should You Have

Its Best To Keep Your Retirement Savings To Maximize Your Savings And Flexibility.

Your retirement savings don’t all have to live in one place—much like you in retirement. In fact, financial experts often advocate for keeping your retirement money in a few types of accounts to maximize your savings and flexibility. You should ask yourself, “What retirement accounts should I have, and in what order should I fund them?”

Your first priority is to fund your 401(k), especially if an employer match to your contribution is available to you. You should strive to contribute to the maximum percentage your employer will match . For example, if your employer matches up to 3% of your contribution, and your pretax salary is $100,000, you should contribute $3,000, so that you can take advantage of the $3,000 that your company is offering you. That’s as close to free money as you’ll get.

OK, but what if you have more than $3,000 to save for your twilight years and want to squeeze out every tax benefit? Experts don't agree on your next best next move, but this is one possible route.

If you have a high-deductible health plan, a health savings account (HSA) is an amazing retirement savings option because of its triple tax benefit: you pay no tax on contributions, growth is tax-free, and you don't have to pay taxes on withdrawals for qualified medical expenditures.After you reach age 65, you can take out as much money as you want for any purpose; however, funds used to pay for a non-qualified medical expense are taxed like traditional 401(k) contributions. In 2022, the maximum HSA contribution will be $3,650 per person or $7,300 per family.

If you have even more to contribute, take a look at IRAs. Like 401(k) plans, they come in Roth and traditional varieties, which are different with respect  to when you pay tax on the contributions and earnings. In general, IRAs give you greater flexibility in terms of investment alternatives and early withdrawals. For example, you can withdraw up to $10,000 to buy your first house. (Not that it’s necessarily a positive thing to use money  from your retirement to buy a home…but that's discussion for a future post). The maximum amount that can be contributed to an IRA is $6,000 (or $7,000 if you're over 50), and some of the benefits diminish as your earnings rise.

After that, you can return to your old 401(k), whose employee-side contribution limits will be $20,500 in 2022. And while it may not be around for long, you can use a back door or mega-backdoor Roth conversion to put even more money into your tax-advantaged retirement accounts. Talk to a financial advisor or tax pro about what is the personalized best approach for you.

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