When it comes to saving for retirement, maxing out your 401(k) and/or Individual Retirement Account (IRA) is just the beginning. Here are four scenarios in which you may be able to give your savings an extra boost.
Scenario 1: Your spouse doesn’t work
So long as you have earned income, your nonworking spouse can maintain a separate IRA in her or his name—funded from your earnings—effectively doubling your savings potential.
If you earn income from freelance work or a side business, you may be able to contribute to a Savings Incentive Match Plan for Employees (SIMPLE) IRA, a Simplified Employee Pension (SEP) IRA or a Solo 401(k)—even if you contribute to a 401(k) offered by your primary employer. Be aware, however, that you may not be able to max out both your company 401(k) and a self-employment retirement plan, so be sure to check IRS rules at irs.gov/retirement before contributing.
Scenario 3: You participate in a high-deductible health plan
Participants in such plans are eligible to open a triple-tax-advantaged health savings account (HSA): Contributions are federally tax-deductible; capital gains, dividends and interest accumulate tax-free; and you pay no tax on withdrawals for qualified medical expenses. Beginning at age 65, HSA withdrawals used for any other purpose will be taxed as ordinary income, putting them on the same footing as funds from an IRA. Best of all, HSAs aren’t subject to required minimum distributions (RMDs) based on your age, giving you greater control over withdrawals.
Starting in the year you turn 50, the IRS allows you to save an extra $6,500 annually to your 401(k) and $1,000 annually to your IRA, thanks to catch-up contributions. That means in 2020 you can put away as much as $26,000 in your 401(k) and $7,000 in your IRA.