5 Ways to Save for Retirement With Some Surprising Benefits
June 13, 2013When it comes to saving for retirement, most people know to contribute to their employer’s retirement plan (at least enough to max out their employer’s match) but there are also other ways of saving for retirement with some unique benefits that are not quite as well known. Here are 5 that you want to take advantage of if possible:
Health Savings Account
What it is: When paired with a qualified high-deductible health insurance plan, an HSA allow you to set aside money tax-free to pay for qualified health care expenses, including many alternative forms of medicine like acupuncture and chiropractic care that may not be covered by insurance. (Some employers may also contribute money to your HSA on your behalf.) Unlike FSAs, whatever you don’t use can be rolled over for the future. However, there’s a tax plus a 20% penalty if you withdraw money for non-qualified expenses.
Little known benefits: Once you turn 65, your HSA can be withdrawn for any purpose without penalty so it can be part of your retirement savings. (If you use it for non-health care expenses, it will still be taxable.) In fact, you might want to avoid touching your HSA to cover current medical expenses so that it can grow to be tax-free for health care expenses in retirement, especially if your plan allows you to invest your HSA in mutual funds. But save your medical receipts because the amount of your qualified health care expenses can be withdrawn tax-free anytime in case you need to tap your HSA for another purpose.
Roth IRA
What it is: This account allows you to contribute money that can grow to be tax-free after age 59 ½ as long as the account has been open for at least 5 years.
Little-known benefits: Whatever you contribute to a Roth IRA can be withdrawn at any time and for any purpose without tax or penalty. This means you can use it to build your emergency fund and then invest the money more aggressively for retirement once you’ve accumulated enough emergency savings elsewhere. Just be aware that if you withdraw earnings before age 59 ½, they may be subject to taxes plus a 10% penalty but the sum of the contributions always come out first.
Another little-known benefit is a way to put money in a Roth IRA even if you earn too much to contribute. It’s called a “back-door” Roth IRA contribution. Simply contribute to a traditional IRA and then immediately convert it to a Roth since there’s no income limit on conversions. There are a couple of caveats to be aware of though. First, the converted money cannot be withdrawn penalty-free for 5 years. Second, if you have other pre-tax IRAs, you will have to pay a tax when you do the conversion since the IRS considers all the IRAs to be one account. You can avoid this by rolling those other IRAs into your employer’s retirement plan.
457 Plan
What it is: Pre-tax retirement plan for certain public employees.
Little known benefit: Unlike other pre-tax retirement plans, there’s no penalty for early withdrawals after you separate from service. That means if you have a 457 and another plan like a 401(k), you might want to first fund the 457 after maxing the match in your other plan. After all, you never know what emergency could require you to tap into it early.
Employer Stock
What it is: You may be able to purchase your company stock in your retirement plan or receive it as matching contributions.
Little known benefit: If you withdraw the stock in-kind after leaving your company, you can pay a capital gains tax on the growth rather than the higher ordinary income tax rate. However, you lose this ability if you roll it into an IRA.
Regular Investment Account
What it is: This is any account that you invest in outside a qualified retirement plan.
Little known benefits: If you max out your tax-advantaged retirement accounts, there are still a host of tax benefits you can get by investing in a regular account too. You can use net losses to offset your ordinary income taxes (as long as you don’t repurchase the same investment within 30 days). You can take the foreign income tax credit for taxes paid on your international investments to foreign governments. Finally, when you pass away, your heirs can inherit your investments without having to pay a tax on all the accumulated growth.