4 Lesser-Known Ways To Catch Up on Retirement Savings
The best way to save for retirement is to start early and contribute often. Unfortunately, that’s not always possible.
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If you’re looking ahead at retirement and realize that you need to save more, you can catch up on your retirement contributions in a few different ways that fly under the radar.
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Health Savings Accounts
A health savings accounts (HSA) is usually used to pay for unreimbursed medical expenses, but it can also be a tax-advantaged way to save for health costs in retirement. HSAs have several benefits, including that contributions are made pre-tax (or tax-deductible if your HSA is not provided through your employer), the funds grow tax-free, and withdrawals are tax-free if the money is used for eligible health care expenses.
To qualify for an HSA, your health plan must have a deductible of at least $1,600 for individual plans or $3,200 for a family plan, and the plan must limit out-of-pocket expenses to $8,050 for individual plans and $16,100 for family plans.
In 2024, you can contribute up to $4,150 to an HSA for an individual plan or $8,300 for a family plan. If you will be 55 or older at the end of 2024, you can contribute an extra $1,000 in catch-up contributions to your HSA.
“People generally overlook HSAs as an excellent retirement savings tool,” said Bill Ryze, chartered financial consultant with Fiona.com. “If you have a high-deductible health plan (HDHP), you can contribute to an HSA, which offers triple tax advantages. First, your contributions are tax-deductible. Second, your earnings grow tax-free, and third, withdrawals for qualified medical expenses are tax-free. Besides, after 65, you can use the HSA funds for non-medical expenses without penalty. However, they will be taxed as ordinary income.”
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Catch-Up Contributions
Not everyone may know that you can actually take advantage of catch-up contributions if you are 50 or older. With a catch-up contribution, you can make additional contributions to a 401(k) account or IRA beyond the normal contribution caps that are allowed.
The catch-up contribution limit for an IRA in 2024 is $8,000 for an individual, which includes the normal contribution limit of $7,000 plus an additional $1,000 of catch-up contribution. The catch-up contribution limit for a 401(k) in 2024 is $30,500, which includes the normal contribution limit of $23,000 plus an additional $7,500 of catch-up contribution.
The IRS also allows catch-up contributions for people who participated in Thrift Savings Plans, 403(b), and SIMPLE IRA plans. In 2024, the catch-up contribution amount for the 403(b) and Thrift Savings Plans is $7,500, and $3,500 for the SIMPLE IRA plan.
Backdoor Roth IRA
A backdoor Roth IRA is not a different type of IRA. Instead, it’s a way to convert nondeductible contributions in a traditional IRA to a Roth IRA for those who earn too much money to be eligible to contribute to a Roth IRA.
Single taxpayers who earn $161,000 or more, or “married filing jointly” taxpayers who earn $240,000 or more, are not eligible to contribute directly to a Roth IRA in 2024. With a backdoor Roth IRA, taxpayers who earn more than this can still contribute to a Roth IRA.
The benefits of a Roth IRA include having your money grow tax-free and being able to withdraw the converted amount tax-free in retirement. Also, unlike traditional IRAs, you don’t have to take the required minimum distributions from the new Roth IRA account.
In a traditional Roth IRA conversion, you transfer tax-deductible contributions from a traditional IRA to a Roth IRA. While a Roth conversion is taxable when you make it, your investment will grow tax-free.
You can take the backdoor Roth IRA a step further and create a mega backdoor Roth IRA, in which you’ll transfer your Traditional IRA and convert the funds in your 401(k).
“A mega backdoor Roth IRA allows you to save more than the standard Roth IRA limit,” said Ryze. “Once in the Roth IRA, your investments grow tax-free, and withdrawals in retirement are also tax-free.”
Spousal IRA
A spousal IRA is when a working spouse contributes to an IRA in the name of a non-working spouse with little or no income. Usually, an individual must have earned the income to contribute to an IRA. The spousal IRA is an exception to this provision. However, the working spouse’s income must equal or exceed the total IRA contributions made on behalf of both spouses.
Spousal IRAs are not joint accounts. Each IRA is set up in the individual’s name. Spousal IRAs can be Roth IRAs or traditional IRAs. They are subject to the same annual contribution limits, income limits, and catch-up contribution provisions as traditional and Roth IRAs. For 2024, married couples filing jointly can contribute $14,000 to IRAs per year or $16,000 if they are age 50 or older with the catch-up contribution provision.
In summary, taking advantage of these lesser-known methods can help you catch up on retirement savings if you feel like you are behind or have extra money to save.
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This article originally appeared on GOBankingRates.com: 4 Lesser-Known Ways To Catch Up on Retirement Savings