If you’re under 50 years old, you can put up to $18,000 into your 401(k), this year. If you’re 50 or older, you can make a catch-up contribution up to $6,000 (for a total of $24,000). But that might not be enough for you, as you near retirement age. Luckily, you can do more than just rely on a tiny fraction of each paycheck.
In fact, there are all sorts of ways to get creative with your Health Savings Account (HSA) and work around Roth IRA contribution limits. Check out this list of little-known tips and tricks that can help you squeeze more mileage from a menu of retirement-savings opportunities:
Your unused HSA funds can be used in retirement.
You already know that you can use HSA funds to pay for qualified medical expenses at any age. And you know that, if you use this money for any other purpose, it’s subject to income tax and an additional 20 percent penalty.
But here’s the secret: The IRS allows penalty-free distributions from HSA accounts for non-medical expenses if the account holder turns 65, becomes disabled, or passes away.
In other words, your unused HSA funds can be used as supplemental retirement funds once you turn 65. If you’re enrolled in an HSA-eligible, high-deductible health plan, you can pay out-of-pocket for medical expenses and choose not to reimburse yourself. Then you can invest your HSA balance and allow these funds to accrue tax-deferred growth over the years. This is especially good news if you’re already maxing out your contributions to other retirement accounts, such as your 401(k) and IRA.
You can process backdoor Roth IRA conversions.
This year, you’ll be eligible to contribute to a Roth IRA if your adjusted gross income (AGI) is less than $132,000 if you’re single or head-of-household, or $194,000 if you’re married-filing-jointly.
If your AGI is higher than those thresholds, there’s a little-known strategy that you can adopt called a backdoor Roth conversion.
Here’s how it works: First, you’ll make a nondeductible contribution to a Traditional IRA (which is sometimes called a Contributory IRA.) How much? You can contribute up to $5,500 into this account, or $6,500 if you’re 50 and older. Then you’ll convert part or all of those funds into a Roth IRA account. To do so, you’ll have to fill out a form requesting this conversion. Hint: A “conversion” is different than a “recharacterization.” Sure, it’s a little complicated, but well worth it.
You can make prior-year contributions.
Uh-oh. The clock struck midnight, it’s New Year’s Day, and you’ve suddenly realized—with a sinking feeling in the pit of your stomach—that you didn’t save enough for retirement last year.
Maybe you forgot to contribute to your IRA or HSA? Or perhaps you started a new job and haven’t made many 401(k) contributions yet?
Don’t worry. You actually have until the tax deadline (April 18, 2016) to make “prior-year contributions,” which are retirement contributions that count towards the previous year’s limits.
Simply earmark your retirement contribution for the prior year when you deposit the money. (If you don’t specifically indicate that it’s a prior-year contribution, it’ll count towards the current calendar year.)
You can blend tax planning with retirement planning.
Many retirees who stop working before Medicare eligibility kicks in choose to tap their Roth IRA accounts to cover health-related costs, like individual insurance premiums. The idea behind this is that Roth IRA withdrawals are tax-free, and therefore won’t impact taxes during the early years of retirement.
On the flip side, however, Roth IRA accounts don’t require minimum distributions (RMDs) and can continue their streak of tax-free growth for decades into retirement. This is why some retirees choose to turn to tax-deferred IRA accounts first, while letting their Roth accounts ride.
Meet with a CPA or financial advisor to get an idea of proper tax planning for your specific, personalized retirement situation. Then blend your retirement savings with this tax plan. By incorporating a hefty dose of tax planning into your retirement savings strategy, you can better understand which accounts to maximize or withdrawal from first.
You can process backdoor Roth conversions during an early retirement.
Remember all that talk from earlier about backdoor Roth conversions? Here’s another tip: If you plan on stepping away from paid employment for a few years (for example, to look after children), you could delay processing your Traditional-to-Roth conversions until after your employment break begins.
These conversions are taxed as ordinary income, but you’ll be in a lower tax bracket because you’ll no longer be working full-time. Depending on your timeframe, you could gradually process these conversions over a lengthy time period so that your tax bracket remains low (assuming you have few other sources of ordinary income).
By focusing on tax-deferred retirement contributions while you’re working, and converting these into Roth contributions during the years you’re not working, you can maximize the benefit on both ends.