WHAT ARE THE BEST RETIREMENT ACCOUNTS FOR YOU?

Note from the author: All contribution limits have been updated to reflect 2022 limits.

You know that you have to save for retirement, but where do you put all of your hard-earned money? While there are many retirement savings vehicles out there, making the most of the right ones can set you up for a safe and happy retirement. 

What accounts are available, and which ones are best for you? Let’s take a look and find out.

Individual Retirement Accounts

IRAs are among the most popular savings vehicles around. With flexible investment options, greater control over fees, and generous contribution limits, IRAs can help you save a significant amount in taxes each year. 

IRAs come in all shapes and sizes, and you can likely find one that will suit your needs. The two most popular ones we will look at today are:

1. Traditional IRA
2. Roth IRA

Both accounts allow you to save up to $6,000 in 2022, with an additional $1,000 in catch-up contributions for those over 50. (These limits are put in place by the IRS, and can be found listed here.) These accounts also offer increased flexibility and control over the investments you choose. The critical difference between these two? Taxes. Let’s see how taxes function in these accounts, and how it could serve your retirement plan. 

Traditional IRA

Traditional IRAs are tax-deductible retirement accounts. Investors contribute pre-tax dollars, enjoy tax-deferred growth, and only pay taxes when they withdraw funds in retirement. This contribution tactic lowers your annual taxable income, which could improve your tax bracket and overall tax bill come April. 

Traditional IRAs do have required minimum distributions (RMDs), which, thanks to the SECURE Act, pushed the starting age to 72. RMDs mark the time when you have to start taking regular withdrawals from your account. But the CARES Act suspended RMDs for 2020, meaning that retirees don’t have to begin withdrawals for another year. 

What’s the catch? The IRS puts a limit on the amount you can deduct if you or your spouse is enrolled in a workplace retirement plan or if your income surpasses a certain amount. If a workplace plan doesn’t cover you, you can always deduct your full contribution up to the annual limit. But if you are covered elsewhere, that’s where the rules start to change. 

Let’s say that you are married filing jointly. In this case, the IRS gives you two options. 

1. If you have coverage under another workplace plan and you make over $109,000, you can only take a partial deduction. If you make over $129,000, you can’t take a deduction at all.
2. If your spouse has coverage under another plan and you don’t, your partial deduction starts once you make over $204,000 and stops if you make over $214,000. 

The limits on your deductions don’t impact the amount you can contribute. Instead, it just changes the tax-benefits you can take part in. Proper tax planning is crucial to a solid retirement plan, which makes the accounts you choose to contribute to so important. 

Follow the link here to find the full lists of IRS limitations on Traditional IRA deductions for 2021 and 2022.

Roth IRA

A Roth IRA is a particular account that has gained popularity in recent years. Unlike a traditional IRA where contributions are tax-deductible, Roth contributions are never tax-deductible. Instead, you fund the account with after-tax dollars, the account grows tax-free, and qualified distributions are tax-free in retirement. 

Qualified distributions stipulate that the account is at least 5 years old, and you are at least 59 ½ when you begin withdrawing money from it. There are some exceptions, like if you have a disability or are using the funds for qualified expenses like first-time homebuyers ($10,000 limit). 

This saving strategy can boost your retirement income plan by assuming a more substantial tax burden now and mitigating that responsibility in retirement. Your income will likely increase the longer you are in the workforce, meaning if you contribute to a Roth early on in your career, you will be in a lower tax bracket than you would be in retirement. 

Sound too good to be true? The thing about Roth IRAs is that they have income limits for contributions. Where traditional IRAs have income limits for deductions, Roths have limits for contributions. For 2022, if you file as single and make over $144,000, or married filing jointly and make over $214,000, you can’t contribute directly to a Roth IRA.

For those whose adjusted gross income (AGI) exceeds these limits, you can look into a Roth conversion, a strategy that takes assets from a traditional IRA and moves them into a Roth account. There are significant tax considerations when making this decision, so be sure to seek advice from your financial advisor. 

Workplace Retirement Account: 401k

Most workplaces have long replaced their defined-benefit programs (pensions) for a less expensive alternative: defined-contribution plans like a 401k. A 401k allows employees to make salary deductions and funnel those savings into an investment account owned by the employer. 

In 2022, you can contribute up to $20,500 with an additional $6,500 for those over 50. As you can see, these limits are much higher than an IRA, allowing for more retirement savings year to year. But even though you can contribute more, what you contribute to is usually much more limited. Since your employer sponsors 401k plans, the investment options are more limited, and you have less control over where you can invest your money. 

Like a traditional IRA, your contributions to a 401k are made with pre-tax dollars and taxed upon distribution in retirement. 401ks are also subject to RMDs when the account owner turns 72, making tax planning a crucial part of this plan. 

While a majority of the savings burden falls on employees, with a 401k, employers can also contribute to their employees’ savings journeys with an employer match. A match program usually results in a dollar for dollar match up to a certain percentage, anywhere 3-6% is typical. 

But these programs often state that the match will only happen if the employee is contributing that same or higher percentage. So if your company has a dollar for dollar match up to 6%, you should add at least 6% of your salary, so you don’t leave money on the table. There is a combined contribution limit of $61,000 (of $64,500 if 50 or older) in 2022. 

Health Savings Account (HSA)

An HSA is an incredible investment tool available to those enrolled in a high deductible health plan. This account helps people save for healthcare costs, and with healthcare being a primary concern for retirees, this is an excellent account to add to your savings plan. 

HSAs offer three fundamental tax advantages:

1. Contributions are pre-tax.
2. All gains grow tax-free.
3. Qualified distributions for healthcare purposes remain tax-free.

Your HSA balance can roll over year to year, making it a fantastic investment opportunity. In 2022, you can contribute up to $3,650 for self-only coverage and $7,300 for family coverage. Our team would love to talk with you more about how an HSA could benefit your retirement plan.

Branch out of retirement-specific accounts

Several reliable investment options aren’t retirement-focused. One channel we recommend considering is an exchange-traded fund (ETF). ETFs are a low-cost, high-value investment vehicle that provides diverse market exposure.

ETFs, give investors increased flexibility as trading occurs while the market is open, diversify portfolios, can help keep investment costs low, and can be tax-efficient. By investing in avenues outside traditional retirement accounts and workplace plans, you can continue to build wealth and become more financially secure. 

Active wealth building will give you the tools and resources to reach your goals. It also brings freedom and flexibility into your plan, giving you the tools to use your wealth in a way that enhances your life. 

Which plans are right for you?

Investing in the right places can make a significant impact on your retirement income. While there are many elements to consider when investing for retirement, here are some to keep in mind:

• The time horizon for each account.
• The investment options available.
• Your risk tolerance and management.
• Account fees.
• Tax considerations.
• General retirement income plan.

Here at Legacy Wealth Advisors, we love helping clients invest in the appropriate vehicles for their investment needs. Investing for retirement isn’t one-size-fits-all, and our customized approach will help you reach your unique goals and dreams for retirement.

Ready to refine your retirement plan? Schedule a 15-minute call with our team today.