Can You Use An Hsa For Retirement Savings
Yes, you can. Distributions used for qualified medical expenses are tax-free at any age. Distributions that are not used for medical expenses are counted as income and are taxable. In addition, depending on your age, they can be subject to a 20% penalty.
But if you keep these funds in the HSA and begin withdrawing them at the age of 65 or older, you can use them for any purpose, just like a traditional IRA. Like a traditional IRA, you will owe income tax on the money, but no penalties. Penalty-free IRA withdrawals begin at age 59½.
The money deposited to an HSA doesn’t have to come from earned income. It can come from savings, stock dividends, unemployment compensation, or even welfare payments.
Example Of A Spousal Ira
Here’s what happens if Joe and his wife file jointly. With the wife’s $50,000 income, Joe could contribute a total of $7,000 to an IRA for 2021 and has until April 15, 2022, to do so. That’s the standard $6,000 contribution plus a $1,000 catch-up contribution for those age 50 or older. You can contribute to an IRA as late as April 15 of the following year.
Check Your Other Options
To me, an IRA is a smart and simple way to get started, but there are a couple of other ways to save depending on your circumstances:
- If you’re self-employedSEP and SIMPLE IRAs and Individual 401s offer sole proprietors and small business owners a way to increase the amount of money they can contribute to retirement each year. Each is relatively easy to set up, have higher contribution limits and offer a lot of flexibility. Anyone in this category should look into the details.
- If you have a high-deductible health planIf your health plan has a high annual deductible , you may qualify for a Health Savings Account . Similar to an IRA, an HSA lets you make annual contributions and offers significant tax perks. It’s a way to save for current healthcare costs as well as for the future and can be a great complement to an IRA.
- If your state offers an auto-IRASeveral states have recently implemented retirement programs to help workers save, including Auto-IRAs, retirement marketplaces and multi-employer plans. Auto-IRAs require employers who don’t offer retirement plans to automatically enroll their employees in a Roth IRA and deduct contributions directly from their paychecks, similar to a 401. Workers can decide to opt out once enrolled. Some programs are entirely voluntary for workers. Check to see what type of retirement savings program your state may offer if you dont have one at work.
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How To Maximize Savings On A Budget
Even with limited resources, you have ways to maximize your savings so you dont find yourself underwater later on. Here are some of the most useful methods:
- Set up automatic contributions. If you dont ever see the money going into your savings, you wont have the opportunity to miss it. Whether your employer offers direct deposit to multiple accounts or you set your own account to automatically transfer funds into dedicated savings, automatic contributions can be an easy and painless way to integrate savings into your budget.
- Cut down on expenses. Cut back and then you can deposit those extra dollars into your savings account until you begin to hit your goals.
- Focus on the big expense. Forget the scrimping on the occasional coffee: the best place to find savings are your biggest expenses: housing, cars, dining out, travel or whatever you spend big money on.
- Find a side gig. If you dont see any cost-cutting options, you could instead look into a side hustle. Whether you decide on freelance work, a part-time job or passive income, a few extra hours each week can result in a healthy deposit directly into your savings.
Its important to integrate saving into your budget now. Americans biggest financial regret is not saving for retirement sooner, according to a Bankrate survey. You want to get your money working for you compounding your gains as soon as possible.
If Youre Unsure How To Save For Retirement Seek Professional Help
Sitting down with a professional can make a world of difference if you want to know how to save for retirement. If saving for retirement has become a challenge because youre struggling with debt and youre having difficulty managing your money, the best thing to do is to make an appointment with one of our accredited credit counsellors.
A credit counsellor will go through your finances with you, theyll present you with different options personalized to your financial situation, and theyll also help you put together a plan to pay off your debt. And, to ensure your road to financial freedom ends in success, theyll also provide you with budgeting and money management guidance so you can get your finances on track and start saving for retirement.
Once your finances are under control and youve started saving for your retirement, speaking with a financial planner is something worth considering. With a saving plan in place, a financial planner can help you prepare for your future by walking you through different vehicles for your retirement savings, such as a Tax-Free Savings Account or a Registered Retirement Savings Plan. For more detailed information on planning for your retirement, speak with a Financial Planner or get more information here.
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Earning Money In Retirement
You can continue to work part-time in retirement to supplement your personal retirement savings. This is a good strategy if you’re worried about running out of money prematurely, and it can also help assuage boredom in retirement. If you don’t want to work, you could look for alternative ways to earn money in retirement, like buying properties and renting them out or investing in a local business.
Keep in mind that you will owe taxes on these sources of income and that if you don’t have a steady paycheck, you must remember to set aside these funds yourself. Consider a designated savings account where you keep money for taxes so you don’t accidentally spend it.
The Boring Glory Of Index Funds
Your best bet is to buy something called an index fund and keep it forever. Index funds buy every stock or bond in a particular category or market. The advantage is that you know youll be capturing all of the returns available in, say, big American stocks or bonds in emerging markets.
And yes, buying index funds is boring: You usually wont see enormous day-to-day swings in prices the same way you may if you owned Apple stock. But those big swings come with powerful feelings of greed, fear and regret, and those feelings may cause you to buy or sell your investments at the worst possible time. So best to avoid the emotional tumult by touching your investments
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Find Ways To Increase Your Cash Flow
Cutting your discretionary spending is a great way to find a little extra money to put towards retirement, but theres only so much room to cut back. Once youve made some reasonable cuts, its time to focus on finding ways to increase your cash flow. Finding more money each month is easier said than done, but rest assured, it can be done!
A very important key to saving for retirement in Canada that many have lost sight of is to earn more than you spend. Since youve already cut down on your spending by making budget cutbacks, the next thing to do is to up your income. You can ask for a raise at work, or you can apply for a job that offers a higher pay and better benefits. You can also pick up extra shifts or take on a second job during the weekends or evenings, if your schedule allows it. Depending on your skill set, you can also look into starting a side business or freelancing. For example, selling your crafts on Etsy and writing freelance articles and blog posts are great ways to earn extra income. Capitalize on one of your passions and see where it takes you.
Even when you retire, a part-time job might be worth considering. The extra flow of income will pad your retirement account, and the social interactions can help retirees stay active and feel connected.
Dont Get Too Conservative
At 40, youre still a long way from retirement, so dont play it too safe with your investments, says Ellen Rinaldi, former executive director of investment planning and research at mutual fund company Vanguard.
Rinaldi recommends scaling back stocks to 80 percent of your portfolio and putting the balance in conservative holdings like bonds.
Maintain a broad view of all of your holdings as you reallocate assets. Its not just enough to focus on the 401. Take all of your investments into account. Dont forget retirement accounts or benefits from previous jobs either. You can roll over an old 401 into an IRA or your current employers 401, and you can invest any way you want.
It happens all the time people leave money in a 401 and forget about it, says J. Michael Scarborough, CEO of Retirement Management Systems. They take more time on their vacation than they do on retirement planning.
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How Much Money Will You Need To Retire
When clients ask Dan Tobias, a certified financial planner at Passport Wealth Management in the Charlotte, North Carolina area, how much theyll need to retire, hes quick to redirect the question by asking what retirement looks like for them.
Are they looking to drive a Lamborghini, or are they looking to move to a 55-plus type condo in Florida? Tobias asks.
After Tobias understands the persons retirement vision, he can apply certain rules of thumb. One is seeing what 4 or 5 percent of your retirement savings is using the classic 4 percent rule and what your lifestyle would be living off that amount. If that number isnt on target, youll have to either increase your contributions or live more frugally during retirement.
To gauge whether youre saving enough, Fidelity Investments recommends certain levels of retirement savings as you age.
- For instance, at age 30 you should have at least your annual salary saved.
- At age 50, you should have six times what you earn annually saved for retirement.
Some advisors have different estimates: Bank of America estimated middle-income earners would need to save 8.2 times their salary by the time theyre in their early 60s in order to confidently replace their income.
In A Low Tax Bracket Consider Investing In A Roth Ira
Roth IRAs are smart retirement investment choices for young professionals who are in the beginning stages of their careers with lower salaries.
The benefits: Any after-tax Roth IRA contributions will be taxed at the lower rate during that time. Later, you can withdraw that money tax-free, no matter what your tax bracket. A Roth IRA taxes you based on your current tax bracket, but future withdrawals arent taxed as long as you meet certain criteria.
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Consider How Inflation Will Affect Your Savings
Inflation is the rising cost of consumer goods and services. It’s measured by the Consumer Price Index . The CPI measures changes in the price of about 600 consumer goods and services over time.
You can look at the impact of inflation in two ways:
- it will increase the cost of goods and services you buy
- it will reduce the buying power of your savings over time
For example, a $100 purchase in the year 2006 costs approximately $118 is 2016.
Start Saving For Retirement
Take advantage of your employers 401 plan
Try to save at least 10 percent of your pay, including any employer match, in a tax-advantaged retirement account, such as a 401. About 71 percent of workers have access to a retirement plan through their employer, as of March 2020, but only about 78 percent used it, according to a September 2020 report from the Bureau of Labor Statistics.
New workers may be auto-enrolled in a retirement plan, a great move except you may be set up to save a smaller portion of your salary say, 3 percent than whats recommended.
Make sure to increase your contribution or at least set up an auto-escalation so that you put in more each year. And above all, make sure youre getting any free match money from your employer. Here are some other smart moves to make in your 401 plan.
How to save without a 401
If your employer doesnt offer a 401 or youre a part-time worker, consider a Roth IRA. You can save $6,000 in after-tax income, but the money grows tax-free and wont be taxed when you withdraw the funds in retirement.
Alternatively, you can contribute pre-tax income to a traditional IRA up to the same amount as a Roth IRA each year and the funds arent taxed until you withdraw.
In order to replicate the simplicity of a 401, you can set up your direct deposit to automatically contribute to whichever retirement fund you choose. By directing just $500 of your monthly income to an IRA, you can max out your contributions for the year.
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How To Invest Your Money After Retirement
As you prepare your retirement savings portfolio, the first thing you should do is set aside money for emergency purposes . The emergency fund gives you a cushion in the event of illness, natural disaster or any other unforeseen expense, and it provides a backup in the event of another economic crisis. Just make sure you can easily access your emergency money if the need ever arises. Once you’ve got that taken care of, you can explore relevant investment opportunities.
Retirement is not the time to put most of your money into high-risk investments. You want to ensure that you have a secure financial base to last the remainder of your life, which could realistically be several decades. Whatever money you put into a high-risk investment could be lost, so you need to balance things out with low-risk financial opportunities .
Treasury bonds are one of the safer options. They have a fixed rate of interest, which means you’re guaranteed at least that much growth over the life of the bond it won’t earn you as much money as a good stock market gamble, but it will certainly earn more than a bad one. CDs are also a possibility, although you’ll usually be penalized if you need to withdraw money early. If you have an IRA , you can keep our funds there and withdraw without penalty once you reach age 59 1/2 .
Check out the next page for more money management and investment information.
It Seems I Keep Losing Money In My Retirement Accounts These Days Is There A Safe Place I Can Invest My Savings So That At Least It Won’t Be Affected By The Stock Market
Sure, there are plenty of places you can put your retirement nest egg to protect it from a possible setback in the stock market. You could move it into cash equivalents such as a money market fund, an FDIC-insured savings account or CDs. Some investors have even been flocking to gold lately as a refuge for uncertain times.
But the question is should you?
Cash equivalents are very secure and stable, but they yield virtually nothing these days. So you’re paying for security by accepting very low rates of return that may make it difficult for you to build an adequate nest egg that can support you in retirement.
And while gold has shown that it can hold up well, or even thrive, when stocks run into trouble, it’s not as if gold is a model of stability that rarely drops in value. On the contrary, gold can be even more volatile than stocks and is given to steep periodic losses, witness the fact that, after soaring to nearly $1,900 an ounce back in 2011 amid concerns about European debt levels, gold has since declined to just over $1,200 an ounce, a slide of about 35%.
Fact is, while moving your retirement stash to one of the alternatives mentioned above may be “safe” in the sense that it can shield you from a market downturn, it leaves you vulnerable to other risks. So in trying to protect yourself, you may actually be doing the opposite.
So what do I recommend instead?
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Mind The Gaps With An Ira Or Similar
Chances are, at some point in your career you’ll change your employer, get laid off, stop working because of a serious illness, or even take some time out of the workforce. Any of these changes could interrupt the rate at which you’re socking money away for the golden years. To keep your retirement plan on track in the face of times like these, you may need to save in an IRA or a taxable investment account until you become eligible for a new retirement plan at work.
Figure Out Your Retirement Budget
How much is enough? That depends on your lifestyle and expenses, potential medical bills and the kind of support youll have from, say, a pension plan and Social Security. But as you review your savings goals, be careful not to set the bar too low, thinking youll spend less in retirement.
People typically dont downsize, says Harold Evensky, certified financial planner professional and founder of Evensky & Katz/Foldes Financial in Coral Gables, Florida. Its not uncommon for them to spend more in retirement than less.
Fill out a comprehensive retirement expenses worksheet to get a sense of where your money is going when a paycheck is no longer coming in.
To get a more personalized account, contact a fee-only certified financial planner, and make sure they put your needs before their own.
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