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How to Optimize Your Contributions Towards 401(k), HSA, and IRA

— January 13, 2022

By optimizing the contributions, you can build up a portfolio that is sufficient to fund a comfortable retirement.

Consider yourself fortunate if you have access to 401(k), IRA, and HSA. But, if you want to make the most out of these saving accounts, you need to play it smart. A lot of people get confused between 401(k) vs IRA, and this confusion can come in the way of prioritizing your investments between these accounts. Therefore, it is important that you understand your retirement saving accounts well to create a solid retirement contribution strategy around HSA, 401(k), and IRA. 

Below, we have created a framework to help you optimize your contributions towards HSA, IRA, and 401(k). Read on to know more.

1. Make the Most Out of Your 401(k)

Here are some options for optimizing your 401(k) contributions to maximize your retirement savings and tax benefits:

  • Max Out 401(k) Employer Contributions

If your employer is offering matching contributions, you need to take advantage of their match. When it comes to retirement savings, every penny counts. And you should make sure you’re not leaving free money on the table. For example, if your employer can match up to 3% of your contribution, make sure you contribute 3% to your 401(k) so that your employer also contributes 3%. This means, instead of saving only 3%, you are saving 6%. You double your contribution with an employer match. If you’re not already maxing out your 401(k) contribution, speak to your employer or HR to increase your 401(k) contribution amount.

  • Max Out Salary-deferred Contributions

To ensure you are keeping aside a sufficient amount for retirement, contribute as much to your 401(k) as your budget allows. These contributions aren’t just investments for a future retirement lifestyle but offer immediate 401(k) tax benefits. Since the contributions are made with pre-tax dollars, they lower your taxable income for the year in which you contribute.

  • Take Advantage of Catch-Up Contributions

    Plants growing out of coins, indicating growth of investments; image by nattanan23, via Pixabay, CC0.
    Image by nattanan23, via Pixabay, CC0.

If you are over age 50, you can take advantage of catch-up contributions to increase your retirement savings. As you reach closer to your retirement, especially if you are left behind in reaching your retirement goals, catch-up contributions can make all the difference. The extra contribution also lowers your taxable income. The catch-up contributions might not lower the tax bracket for everyone, but it certainly reduces the tax burden the next time you file your taxes.

  • Revisit Your 401(k) Contributions

With the increase in contribution limits, it’s worth reviewing your 401(k) to make sure your retirement goals are still on track. Determine whether the contribution amount you’ve set is enough to help you reach your goals. Also, review your budget to figure out if you can max out your contributions. If you cannot max out, increase your contribution amount gradually depending on the rules of your plan and your budget.

2. Max out Your HSA Contributions 

Contributions made to health savings account (HSA) are tax-deductible, earnings are tax-deferred, and the withdrawals used for medical expenses are tax-free. You can use the money in the HSA account to pay for qualified out-of-pocket medical expenses such as prescriptions and copays for doctor visits. If you don’t want to use the money, you can leave it in the account and let it grow.

When you reach 65, the funds are tax-free, and you can spend the money on qualified expenses. You can also spend the money on non-medical things. However, it will be treated as regular income and will be taxed. However, no penalties will be applied. There is no risk in over-funding your HSA because if you are not using the money for medical expenses, you can use it to supplement your other retirement savings.

3. Invest in an IRA

After you’ve taken advantage of your employer match, maxed out your HSA contributions, and hit the cap on the 401(k) contributions, invest in a traditional IRA. An individual retirement account (IRA) complements well with your employer’s retirement plans. An IRA allows you to invest in a broader range of investments. If you leave your job, you can consider rolling your employer’s retirement plan into an IRA without tax implications if done correctly. A Roth IRA is also a good option if you want to contribute after-tax dollars to make tax-free withdrawals in retirement.

In Conclusion

By optimizing the contributions, you can build up a portfolio that is sufficient to fund a comfortable retirement. Get started on achieving the above three goals, and that should put you on track for the retirement you desire.

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