Saving for retirement can feel overwhelming, but the good news is that you don’t need to make drastic changes to see meaningful results. Whether you're just getting started or looking to maximize your existing savings, small, strategic adjustments can significantly impact your financial future. Let’s explore five effective strategies that can help you grow your savings and get closer to achieving your long-term financial goals.
1. Maximize tax-advantaged contributions
Fully utilizing tax-advantaged retirement accounts like 401(k)s and IRAs can significantly enhance your long-term savings. Here's how you can make the most of these opportunities:
- 401(k) Contributions:
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- 2024: You can contribute up to $23,000 to your 401(k). If you're aged 50 or older, you can make an additional catch-up contribution of $7,500, bringing the total potential contribution to $30,500.
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- 2025: The contribution limit increases to $23,500, with the catch-up contribution for those 50 and older remaining at $7,500, allowing for a total contribution of $31,000. Notably, for individuals aged 60 to 63, the catch-up contribution limit rises to $11,250, permitting a total contribution of $34,750.
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- IRA Contributions:
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- 2024 & 2025: You can contribute up to $7,000 to a Traditional or Roth IRA. If you're 50 or older, you can make an additional catch-up contribution of $1,000, totaling $8,000.
2. Take advantage of catch-up contributions
If you're over age 50, you have the opportunity to boost your retirement savings beyond standard contribution limits through catch-up contributions. This provision allows you to allocate additional tax-advantaged funds, enhancing your financial preparedness for retirement.
401(k) Plans:
- 2024: The standard employee contribution limit is $23,000. If you're 50 or older, you can contribute an extra $7,500, bringing your total potential contribution to $30,500.
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- 2025: The standard contribution limit increases to $23,500. Those aged 50 and above can continue to make catch-up contributions of $7,500, allowing for a total contribution of $31,000. Additionally, individuals aged 60 to 63 can make enhanced catch-up contributions of up to $11,250, increasing their total potential contribution to $34,750.
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IRAs:
- 2024 & 2025: The contribution limit remains at $7,000. Individuals aged 50 and above can make an additional catch-up contribution of $1,000, totaling $8,000.
By taking advantage of these catch-up contributions, you can significantly enhance your retirement savings, leveraging tax-deferred growth to better secure your financial future.
3. Explore your HSA investment options
If you have a high-deductible insurance plan you can use an HSA to set aside pre-tax funds to spend tax-free on deductibles, co-pays, and other qualified medical expenses either now or in the future. If you’re single, you can deposit up to $4,150 each year into your HSA, and up to $8,300 for family coverage for your spouse and/or children.
HSA account holders can invest the funds in stocks, bonds, mutual funds, or ETFs, but only a small fraction take advantage of this option. According to a study by the Employee Benefit Research Institute, only 24% of HSA account holders currently invest their funds—everyone else is keeping their HSAs in cash.
Investing allows your HSA funds to potentially grow over time. That can provide extra funds for health care costs now, and, after age 65, you can make taxable withdrawals from your HSA for any reason without penalty. Explore your HSA investment options with your financial advisor to maximize the potential of your HSA funds after you’re no longer working.
4. Consider a Roth conversion
You may be able to roll over funds from your traditional 401(k) account to a Roth IRA to provide a bucket of tax-free income you can draw from when you retire. Contributions to 401(k)s are made pre-tax, so when you roll the funds over to a Roth, you’ll have to pay taxes on them. From there, they can grow tax-free, and you won’t pay taxes on them when you make withdrawals.
While Roth IRAs offer valuable tax-free growth and withdrawals in retirement, contributing directly to one can be challenging if your income exceeds certain limits.
In 2024, your ability to contribute to a Roth IRA depends on your Modified Adjusted Gross Income (MAGI):
Single filers: You can contribute the maximum amount if your MAGI is less than $146,000. Contributions phase out between $146,000 and $161,000 and are eliminated above that range.
Married filing jointly: You can contribute the full amount if your MAGI is below $230,000. Contributions phase out between $230,000 and $240,000 and are not allowed above this range.
If your income exceeds these limits, you may still be able to take advantage of a Backdoor Roth IRA strategy, which involves making non-deductible contributions to a Traditional IRA and then converting those funds into a Roth IRA. However, this approach has tax implications and requires careful planning.
5. Assess your annuity options
If you still have retirement money to invest after you’ve maximized your 401(k) and IRA options, an annuity may be suitable. An annuity is an insurance product that you can purchase with a lump sum of cash or a series of payments. Depending on the specific annuity, you may be able to access market upside while also guaranteeing a level of income in retirement.
Maximizing your savings and retirement income comes down to making informed, strategic choices that align with your unique financial situation. Whether you're looking to increase contributions, optimize tax advantages, or adjust your investment strategy, small changes can have a big impact over time. If you have any questions or want a personalized approach to your retirement planning, we’re here to help. Let’s work together to ensure your money supports the retirement you’ve envisioned. Reach out today to get started!
Sources:
1 “Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits,” IRS.gov, 25 October 2022, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
2“401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500,” IRS.gov, 15 March 2023, https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500
3“Retirement Topics – Catch-Up Contributions,” IRS.gov, 26 October 2022, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions
4“Publication 969 (2022), Health Savings Accounts and Other Tax-Favored Health Plans,” IRS.gov, 1 February 2023, https://www.irs.gov/publications/p969
5“Publication 969 (2022), Health Savings Accounts and Other Tax-Favored Health Plans,” IRS.gov, 1 February 2023, https://www.irs.gov/publications/p969
6“Amount of Roth IRA Contributions That You Can Make For 2023,” IRS.gov, 15 March 2023, https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2023
