As retirement gets closer, Americans know they need to save more. But what is the best approach for the over 50 crowd? As you near the end of your working life, are you better off putting money in a company 401(k), an individual retirement account or a health savings account? The self-employed, who don’t have company 401(k) plans, have even more saving choices.
Use them all, experts say. What will matter most is that you save, not where you save.
“Put as much as you can in, and certainly take advantage of the catch-up provisions,” says Roger Wohlner, a financial advisor and freelance writer in Arlington Heights, Illinois, who blogs at The Chicago Financial Planner. Catch-up provisions allow Americans age 50 or older to contribute more to retirement accounts.
There are some situations in which it makes more sense to maximize contributions to one plan over another, but the choice almost always depends on your individual situation. If you have specific saving questions, consult your accountant or a financial advisor.
“If you’re a spender and you know you’re a spender, to save for retirement you’ve got to find a way to hide it a little bit more,” Adam says. “People, once they start dipping into their retirement bucks, it’s hard to stop. Retirement accounts look big … and it is a lot of money, but when you live on it for 30 years, it’s not.”
If your employer matches any level of 401(k) contributions, that’s the place to start, by contributing what it takes to get the maximum match. That’s free money and a much better return than you’d get through any investment.
If you are self-employed or have a side business that makes money, retirement savings vehicles for the self-employed offer an opportunity to save significantly more. “You can salt away a ton of money, and that’s a good way to get caught up,” Wohlner says.
Here are seven things to consider when choosing where to stash your retirement funds after 50:
Maximize your 401(k) contributions. This is one of the easiest and most efficient ways to save for retirement if your employer offers that option. The money goes into retirement savings before you receive it. If you’re 50 or older, you can save up to $24,000 in 2015 (the limit is $18,000 if you’re younger). The employer match is added on top of this amount. If one spouse has a better plan than the other, with a bigger match and better investment choices, maximize contributions to that plan first. “If there’s a match, you at least want to put in enough to get that,” Wohlner says.
Contribute to a traditional IRA. If you’re over 50, you can contribute $6,500 a year to your IRA ($5,500 if you’re younger). If you’re covered by a retirement plan at work and you earn more than $71,000 ($118,000 married filing jointly), you can’t deduct your IRA contributions on your taxes. If you earn more than $61,000 (single) and $98,000 (married filing jointly), you get only a partial deduction. Even if you can’t get a deduction, you may want to contribute because retirement accounts are protected from creditors.
Take advantage of catch-up options. Many types of retirement accounts, including IRAs, 401(k) plans and HSAs, allow older savers to contribute more than the standard limits and get a corresponding tax deduction. Do it.
Weigh a traditional IRA against a Roth IRA. If your income is higher now than you expect it to be in retirement, you may be better off contributing to a traditional IRA, taking a tax deduction now and paying taxes when you withdraw the money in retirement. If you’re not earning much now, it could be a good time to contribute after-tax money to a Roth IRA, which allows tax-free withdrawals in retirement. You can only contribute to a Roth if you make less than $131,000 (single) or $193,000 (married filing jointly). If your income is more than $116,000 (single) or $183,000 (married filing jointly), your allowable Roth contribution is reduced. You can also split your contribution between traditional and Roth IRAs.
Consider a health savings account. If you have a health insurance plan with a high deductible, you may have the option of an HSA. Those over 55 can contribute up to $4,350 a year tax-free ($3,350 per individual or $6,650 for a family if you’re younger). You can withdraw money from the account anytime to pay for health care expenses, but if you don’t have expenses or pay for health care out of pocket, you can save that money for health care in retirement. “It’s actually usable,” Adam says. “The other accounts are not usable.”
Use retirement vehicles for the self-employed. Retirement accounts for people who own their own businesses provide the opportunity to save even more. If you have employees, a SIMPLE IRA, which allows you to set up an IRA for employees with less paperwork, is your best choice, and you can contribute up to $15,500 if you’re over 60 ($12,500 if you’re younger). Those without employees have the option of a Solo 401(k) or a SEP IRA. “Those are great because they’re going to let you put in more than an IRA,” Adam says. The Solo 401(k) allows you to contribute more if you’re not a high earner, since you can contribute up to $24,000 if you’re over 50 (assuming you did not contribute at another job) plus 25 percent of the business income, up to a total of $59,000 ($53,000 if you’re younger than 50). The SEP IRA allows for a contribution of up to 25 percent of your business income or $53,000, whichever amount is less. If your spouse works for your business, he or she can also contribute to a retirement account. You can also use these savings vehicles if you have a side business in addition to your regular job.
Consider investments that aren’t tax-advantaged. Once you retire and start withdrawing from your retirement accounts, you’ll have to pay taxes on the money you withdraw from traditional IRA accounts. That could trigger a significant tax liability if, say, you want to pay for a cruise around the world one year. If you have savings in other types of accounts, such as a Roth IRA, a brokerage account or other investments outside an IRA that won’t require you to pay taxes on withdrawals, you can better control your finances. “That gives you the most flexibility when you need money,” Adam says.
A version of this story appeared previously at U.S. News & World Report.