Some investors may be looking for ways to manage their potential investment-related losses and tax obligations. If this describes you, tax-loss harvesting might be a strategy worth considering. However, it can be difficult to execute and should not be attempted without first consulting a tax professional as the amount of savings provided by tax-loss harvesting may depend on your tax bracket and investment allocation, among other considerations.
To help you understand tax-loss harvesting, here’s a basic primer about what it is and how it works.
What is Tax-Loss Harvesting?
Tax-loss harvesting is a process that involves deliberately selling securities at a loss in order to offset your earnings from other securities, thereby potentially reducing your tax burden. In other words, if you have an investment that’s lost value, you can sell it and deduct the value of that loss from the gains you realize elsewhere. That deduction lowers your total taxable income for the year, which may result in tax savings.
This IRS-approved tax maneuver is only applied to investments bought and sold within taxable accounts; losses cannot be deducted from tax-deferred accounts like traditional IRAs and 401(k)s. Even if your investments only lose money and you don’t realize any capital gains in a particular year, you can still use investment losses to help offset your ordinary income for that year.
Be sure to check the annual limits on the amount of capital gains losses you can deduct from your income each year, although losses that exceed the annual limit can be carried over into following years for harvesting purposes.
What Might Tax-Loss Harvesting Look Like?
To illustrate what tax-loss harvesting can look like in practice, let’s say you bought a stock less than a year ago that’s since gained $10,000 of value. In most cases, long-term losses (incurred by assets you’ve held for more than a year) can only be used to offset long-term gains. Short-term losses (incurred by assets you’ve held for less than a year) can only be used to offset short-term gains. Also less than a year ago, you bought a stock that ended up losing $15,000 of value over the same period. You sell the first stock at a profit of $10,000 and the second stock at a loss of $15,000 for a net loss of $5,000.
In this case, your $15,000 loss would offset all of the taxes you owe on the $10,000 profit, and you can use the additional $5,000 to offset up to $3,000 of your ordinary income (the IRS limit). The remaining $2,000 loss can then roll over into the following tax year.
Bear in mind that these deductions are taken from your total income that’s subject to taxes, not from your tax bill. Assuming a 24% tax rate and that your deduction doesn’t drop you into a lower tax bracket, harvesting a loss of $3,000 might save you $720 in ordinary income taxes. The savings have the potential to be even greater as your tax rate increases.
Tax-loss harvesting can be a complicated tactic with many moving parts; it may require you to consult with a financial professional beforehand and it won’t be an effective strategy for every investor in all situations.
Key Considerations for Tax-Loss Harvesting
While you can sell an investment and lock in a loss at any time of the year, many choose to wait until year-end to tax-loss harvest so they can gain a full picture of their annual portfolio performance and its tax implications. The deadline for tax-loss harvesting each year is December 31.
After tax-loss harvesting, consider replacing the assets you’ve sold with others that complement your financial goals and the other investments in your portfolio. Those replacements must meet certain requirements, though. As part of the wash-sale rule, the IRS imposes a 30-day waiting period from the time of sale before you’re able to purchase a “substantially identical” asset to the one you sold.1 Failure to meet these requirements may preclude you from claiming your investment losses for tax purposes.
Tax-loss harvesting operates on the basic idea that a dollar is worth more today than it will be in the future since that dollar can be invested and has the potential to grow before your tax bill comes due. While effective tax-loss harvesting can bear fruit over time – or at least help mitigate losses – it’s still a risky strategy that requires careful planning.
In many cases, it may not be worth it to sell an asset simply to earn the associated tax deduction. More likely, your decision to sell depreciated assets (and harvest the losses from them) will be part of a broader portfolio adjustment or reallocation strategy.
Could Tax-Loss Harvesting Make Sense for You?
By leveraging tax-loss harvesting as another tool within your financial toolbox, you may be able to lower your total tax burden and make tax-efficient adjustments to your investment strategy over time. However, it’s not a tool that should be used lightly – the process can be complex and may not result in savings if improperly handled.
If you’d like to learn more about tax-loss harvesting or other tax-efficient tactics, reach out to a financial professional to discuss your options. A financial advisor can help you determine whether this tactic could help you meet your investment goals.
Best,
Robert (Rory) J. O’Hara III, CFP®, CRPC®
Founder I Senior Managing Partner
This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.
Whether you’re just starting your career or you’re further along in your professional journey, you may have had the opportunity to invest in a 401(k) through your employer. These investment plans provide a tax-advantaged way to save for retirement and, in some cases, your employer may even make extra contributions on your behalf. But what exactly is a 401(k), and how can you take full advantage of one?
What is a 401(k) Plan?
A 401(k) plan is an employer-sponsored defined contribution plan which employees can contribute a portion of their salary to. Within this account, you can invest in a variety of securities – as determined by your employer – to potentially grow your savings over time. In the case of a traditional 401(k), any contributions you make are deducted from your paycheck before taxes are applied, which can help lower your taxes each pay period. Investments made with those contributions are allowed to grow on a tax-deferred basis within the account. You’re then required to pay income taxes on withdrawals you make from the account.
Roth 401(k)
As an alternative to a traditional 401(k) plan, some employers may offer a Roth 401(k). In this plan, your contributions are made with post-tax dollars, but you may be able to withdraw funds tax-free in retirement assuming you meet certain requirements, including:
● It must have been at least five years since you first contributed to the account
● In most cases, you must be at least 59.5 years old
Roth contributions – not the investment returns earned on those contributions – can be withdrawn at any time for any reason. Additionally, you may be able to draw from the account to cover certain qualifying expenses, such as a first-time home purchase. Due to the tax treatments surrounding Roth 401(k)s, it may be a good fit for those who expect to be in a higher tax bracket in retirement and may not benefit as much from lowering their taxable income today. You may be able to make contributions to a traditional 401(k) and a Roth 401(k) if your employer offers both, although they share an annual contribution limit.
403(b) Plan
Similar to 401(k)s, a 403(b) plan is a tax-advantaged retirement account designed for employees who work at public schools or other tax-exempt organizations, such as non-profits. These plans can also come in traditional and Roth models with their respective tax rules. Like a 401(k), 403(b) plans are subject to income restrictions.
Contributing to Your 401(k)
Generally speaking, when you begin a job, you decide how much of your salary to contribute to the company’s 401(k). For instance, if your paycheck is $3,000 and you choose to deposit 5%, then $150 is subtracted before taxes. That means your taxable income becomes $2,850.
Before you start contributing to your 401(k) plan, it’s important to understand how the account works first. For instance, the IRS places limitations on the amount that can be contributed to these retirement accounts each year. Those over 50 years old have a higher annual contribution limit, called a “catch-up” contribution.
Some employers may provide a match for your contributions, often up to a certain percentage of your salary. If your employer offers a 401(k) match program, you should consider taking full advantage of it – otherwise, you’re leaving money on the table.
Your 401(k) plan may allow you to borrow from your account balance, although it’s generally advised not to do so unless it becomes absolutely necessary. Note that if you don’t repay the loan, including interest, unpaid amounts could become a plan distribution.
Choosing 401(k) Investment Options
Once you’ve opened a 401(k) account with your employer, you’ll typically have several investment options provided by the plan administrator. These can include things like bonds, mutual funds, index funds, and even exchange traded funds in some instances. However, options vary widely depending on your employer, and knowing which to choose isn’t always obvious.
A financial advisor can help you make the right investment decisions in your 401(k) plan and beyond. If you’d like guidance on what works best within your financial plan, consider connecting with a financial advisor today.
Best,
Robert (Rory) J. O’Hara III, CFP®, CRPC® Founder I Senior Managing Partner
This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.
Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
Join us as Rory O’Hara, CFP®, CRPC® discusses the many intricacies of estate planning with Colin J. Devlin & how to get the conversation started with family members. Register here!
On December 23, 2022, Congress passed the Secure 2.0 Act into law, as part of a significant $1.7 trillion spending bill. Just like its predecessor, Secure 2.0 includes an extensive list of retirement-related changes designed to expand access to retirement savings accounts and provide more options for contributing to and drawing from these accounts.¹
To help you understand what Secure 2.0 means for you, here are eight significant changes it brings and the impacts they might have:
1. Required Minimum Distributions (RMDs)
One of the most significant changes comes to the way RMDs are handled. Previously, retirees had to begin taking RMDs at 72. Secure 2.0 raised this minimum age to 73 for 2023, and it will increase again to 74 in 2033. Penalties for failing to take an RMD have also dropped to 25%, compared to 50% before.
This provision may benefit those who can afford to hold off on RMD withdrawals because they don’t need access to the funds immediately. So, if you’re turning 72 in 2023 and you’ve already scheduled your withdrawal, you might want to consider making an adjustment to your plan.
2. Retirement Account Catch-Up Contributions
Beginning in 2025, individuals between the ages of 60 and 63 can make catch-up contributions to their 401(k) plans of up to $10,000 or 150% of their regular contributions.
For IRAs, the annual catch-up amount has remained the same since 2006 at $1,000. Starting in 2024, this contribution limit will be indexed to inflation and, therefore, subject to an increase each year.
3. Qualified Charitable Distributions (QCDs)
Secure 2.0 has also expanded the types of charities that can receive a QCD. Individuals who are 70.5 years or older can now give a one-time gift of up to $50,000 to either a charitable remainder unitrust, annuity trust, or gift annuity. However, this money must come directly from your IRA by the end of the year for it to count toward your annual RMD. It’s also important to note that QCDs are not applicable to all charities.
4. 529 College Savings Accounts
Starting in 2024, Secure 2.0 makes it possible for you to move money from a 529 plan directly to a Roth IRA. However, there are a number of conditions you must meet before you can use this provision:
● The maximum lifetime amount you can move is $35,000.
● The annual limit you can move is that year’s IRA contribution limit.
● The beneficiary must have had the 529 plan for at least 15 years.
● The Roth IRA must be under the beneficiary’s name.
● You can’t move any contributions that were made in the last five years.
5. Part-Time Employee Access to Retirement Savings Accounts
Long-term part-time employees can now participate in their employer’s 401(k) plans, provided they meet certain criteria. To qualify for an employer-sponsored retirement plan, you must either:
● Complete one year of service (totaling at least 1,000 hours).
● Or two to three consecutive years of service (with at least 500 hours of service).
For plans beginning in 2025, this three-year rule is reduced to two years.
6. Student Loan Payments
For students who might not be able to save for retirement because they’re paying off student debt, Secure 2.0 allows employers to match employee student loan payments in a retirement account.
7. Automatic Enrollment in 401(k)s
In 2025, businesses adopting new 401(k) or 403(b) plans will be required to automatically enroll eligible employees at a contribution rate of at least 3%. This rule is aimed at increasing retirement savings participation, especially in younger demographics. While employees aren’t required to contribute, they will have to take the extra step of opting out of the program.
8. Emergency Savings
To help people save for unexpected expenses, Secure 2.0 will enable defined contribution plans to add an emergency savings Roth account in 2024. Annual contribution limits are set at $2,500 (or lower, depending on your employer), and may be eligible for an employer match. In addition, the first four withdrawals won’t be taxed or penalized.
Next Steps
SECURE 2.0 brings many changes to the realm of retirement planning, including some that haven’t been addressed here. Consider consulting with an Ausperity Private Wealth team member to determine how these changes might impact you.
Best,
Robert (Rory) J. O’Hara III, CFP®, CRPC® Founder I Senior Managing Partner
Endnotes 1 “Secure 2.0 Act of 2022.” United States Senate Committee on Finance, December 19, 2022. https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf
Disclosures:
This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.
A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. Every state offers at least one 529 plan. Before buying a 529 plan, you should inquire about the particular plan and its fees and expenses. You should also consider that certain states offer tax benefits and fee savings to in-state residents. Whether a state tax deduction and/or application fee savings are available depends on your state of residence. For tax advice, consult your tax professional. Non-qualifying distribution earnings are taxable and subject to a 10% tax penalty.
Securities offered through Sanctuary Securities Inc, Member FINRA, SIPC Advisory services offered through Sanctuary Advisors, LLC. A SEC Registered Investment Advisor. Ausperity Private Wealth is a DBA of Sanctuary Securities, Inc. and a DBA of Sanctuary Advisors, LLC. Do not transmit orders regarding your Sanctuary Securities, Inc. account(s) or Sanctuary Advisors, LLC account(s) via e-mail. Sanctuary Securities, Inc., Sanctuary Advisors, LLC, and Ausperity Private Wealth will not be responsible for executing such orders and or instructions. This e-mail message is intended only for the use of the individual or entity to which the transmission is addressed. Any interception may be a violation of law. If you are not the intended recipient, any dissemination, distribution or copying of this e-mail is strictly prohibited. If you are not the intended recipient, please contact the sender by reply e-mail and destroy all copies of the document.
Mutual funds have become an increasingly popular investment tool due to their widespread accessibility, the diversification they can provide, and the fact that they’re managed by industry professionals.1 In fact, over 115 million individuals in the US – and more than 52% of US households – owned mutual funds in 2022.2 But despite their place in so many investors’ portfolios, these funds are not free of risk.
To help you better understand how these funds work, what their benefits could be, and the risks you might face when investing in them, we’ve put together this guide detailing some of the things you might want to know about mutual funds before investing.
What is a Mutual Fund?
Mutual funds pool money from their different shareholders and invest them in various assets, such as stocks, bonds, and other types of securities. Each shareholder then receives gains or losses that are proportional to their total investment in the fund.
These funds have a relatively low barrier to entry, offering even the most casual market participants the opportunity to participate in a professionally-managed investment vehicle. As with any type of investment fund, the structure and asset allocation of each mutual fund are guided by its stated investment objective – called a prospectus – which varies from fund to fund. Depending on your individual circumstances and financial goals, certain mutual funds may suit you better than others.
8 Types of Mutual Funds
Before we dive into the pros and cons of mutual funds, let’s take a look at some of the different categories that are available for you to choose from.
Stock funds typically invest in equities. Depending on the fund’s stated goals, its managers may determine its holdings based on things like market cap, dividend structure, or growth prospects.
Bond funds focus on income-generating investments like corporate and government bonds, as well as other investments that offer a fixed rate of return.
Balanced funds, sometimes referred to as asset allocation funds, combine different assets to reduce the risk of overexposure to one particular asset class. They can be divided into two subcategories for fixed and dynamic allocation strategies.
Money market funds function similarly to savings or checking accounts in that they hold short-term debt instruments like US treasuries that are lower risk but offer more modest returns.
International and global funds invest in foreign assets. While international funds only acquire assets outside of the country in which they’re based, global funds can invest anywhere – domestically or abroad.
Specialty funds may be further divided into subcategories, such as:
● Sector funds target specific economic sectors, such as healthcare or technology.
● Regional funds focus on a specific geographic area.
● Values-based funds abide by specific criteria for investments based on shareholder beliefs and values.
Potential Pitfalls of Mutual Funds
While mutual funds vary in size, scope, and allocation strategy, they share some potential pitfalls that bear consideration before deciding whether or not to invest in one:
● High Costs & Fees: Professional management often entails higher costs, and some investors may be put off by the associated fees. These payments differ from fund to fund, but they’re generally required regardless of performance.
● Tax Liabilities: Selling assets triggers capital gains taxes, which get distributed regularly with mutual funds. Since you don’t control when assets are bought and sold within a mutual fund, your annual tax burden may be higher or lower than you anticipate.
● Cash Drag: Mutual fund managers may hold a significant portion of cash to maintain liquidity, but this cash doesn’t earn as much as it might if you invested it elsewhere.
Potential Benefits of Investing in Mutual Funds
Mutual funds may be able to provide a handful of benefits including:
● Portfolio Management: With a professional portfolio manager, you don’t have to worry about doing your own research. Mutual fund managers work full-time to monitor investments, maintain a specific risk/return profile, and align the fund with its stated goals.
● High Liquidity: Buying and selling mutual funds can be relatively easy compared to other investment options. Because they hold a large amount of cash, you can often access your money quickly when you need to.
● Diversification: The wide range of mutual fund categories and the mixture of assets within each can allow you to diversify your portfolio. This method can be cheaper and simpler than researching and buying individual assets. Interested in Getting Started?
If you’ve weighed the potential benefits and pitfalls of mutual funds and are still looking to invest in one, consider discussing it with a financial professional who can help you identify the fund that best suits your needs. As with any important financial decision, your choice to invest in a mutual fund should be colored by your individual circumstances and investment goals. Reach out to a Financial Planner at Ausperity Private Wealth to learn more.
Best,
Robert (Rory) J. O’Hara III, CFP®, CRPC® Founder I Senior Managing Partner
This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.
Mutual Funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing in Mutual Funds. The prospectus, which contains this and other information about the investment company, can be obtained directly from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.
Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.
The retirement landscape has shifted in the United States. Gone are the days of the defined-benefit pension plan that saw employees rewarded for their many years of loyal service with a steady stream of checks in retirement. Now, the responsibility of saving for retirement rests on your shoulders. The question is, are you effectively utilizing all the accounts at your disposal?
Everyone deserves to enjoy a comfortable retirement after a long career, but getting there takes discipline and careful planning. With costs rising and life expectancies increasing each year, retirement is becoming more costly. Among the expenses to consider are housing, healthcare, leisure activities, and taxes.
While most taxpayers will qualify for Social Security, those benefits may only account for a fraction of what you need. Luckily, there are many retirement plans available that can make saving for the next phase of your life less daunting. Let’s take a look at some of the more popular options.
The Individual Retirement Account (IRA)
An individual retirement account (IRA) is a tax-advantaged investment account that’s meant to make it easier for Americans to save money for retirement. IRAs generally afford superior flexibility and access to a broader range of investments when compared to other popular accounts like the popular 401(k) but at the cost of lower contribution limits. A variety of different IRAs exist, and each comes with its own set of tax and regulatory implications. The one you choose will likely depend on your employment circumstances and how much you earn. Let’s break down some of the most common types below.
Traditional IRA
The most common type of IRA, the traditional IRA, is available to anyone who earns income within the calendar year they wish to contribute to one. The account is funded with pre-tax dollars and contributions can be invested within the account on a taxdeferred basis. What it means to be tax-deferred is that your account’s earnings (interest and capital gains) are not taxed until you withdraw them, at which point they’re treated as ordinary taxable income. This treatment essentially allows you to kick your income tax burden down the road.
IRA owners are able to invest in almost any asset they choose to, from stocks, bonds, and mutual funds to ETFs and real estate. Another benefit of the traditional IRA is that you can receive a tax deduction for your pre-tax contributions, thus lowering your total taxable income. The annual contribution limit for traditional IRAs is $6,000, or $7,000 if you’re over 50 and qualify for catch-up contributions.
Roth IRA
The Roth IRA is similar to the traditional IRA in terms of which investments you’re able to hold within it, but it differs in terms of how it’s taxed and how you can access your contributions. Roth IRAs are funded with after-tax dollars and the investments within these accounts are allowed to grow tax-free. This means that withdrawals after the retirement age of 59½ occur without having to pay income taxes or other penalties.
Another benefit of the Roth IRA is that you can withdraw contributions (but not the earnings on those contributions) to make important purchases or cover qualifying expenses like college tuition. However, Roth contributions don’t entitle you to a tax deduction, since you’ve already paid income taxes on the money you’ve contributed. The annual contribution limit for Roth IRAs is $6,000 (or $7,000 if you’re over 50) and total combined contributions to Roth and traditional IRAs cannot exceed this figure. Roth IRA contributions are subject to a phase-out of income, meaning if your income is above; $129,000 to $144,000 (single taxpayers and heads of household), $204,000 to $214,000 (married, filing jointly), and $0 to $10,000 (married, filing separately) then you cannot contribute. If this is the case, you should explore if a Backdoor Roth IRA contribution could be a solution for you. For more on a Backdoor Roth IRA refer to a previous article we wrote in early 2022.
SIMPLE or SEP IRA
SIMPLE and SEP IRAs exist to fulfill the retirement-saving needs of small business owners and self-employed individuals, respectively.
If you run a small business, the Savings Incentive Match Plan for Employees (SIMPLE) IRA can help you create a retirement plan for yourself and up to 100 workers. You’ll be required to match your employees’ contributions up to 3% and make a 2% nonelective contribution for all eligible employees each year. The annual limit allows for $14,000 in contributions if you’re under 50 and $17,000 if you’re over 50. SIMPLE IRAs are taxed upon withdrawal, and there’s a costly 25% penalty for any withdrawals made within two years of opening the account.
In the case of the Simplified Employee Pension (SEP) IRA, all contributions are made on behalf of your employer, and the annual limit for 2022 is the lesser of $61,000 or 25% of your compensation. There’s also no Roth option, so any withdrawals in retirement will be taxable as income.
The 401(k)
The employer-sponsored 401(k) is the most widely used workplace retirement planning tool. These plans are established to encourage employees to save for their retirements and they provide exclusive tax benefits that make it easier to do so. Contributions can be made with pre-tax or post-tax dollars and can be invested in securities like stocks, bonds, and mutual funds.
One of the most appealing features of the 401(k) is the ability for your employer to match a portion of each of your contributions. Your employer might offer to match your contributions up to a certain percentage of your salary, for instance, 5%. Employer contribution matches can help increase the amount you’re contributing each period without costing you any extra money. Keep in mind all employer contributions will be made with pre-tax dollars and will be taxed as income when distributed.
Most 401(k) plans allow both pre-tax and Roth contributions. If you anticipate your income tax rate being higher in retirement than it is now, the Roth might be the wiser option for you. Conversely, if you would benefit from lowering your taxable income today by way of deduction, the traditional 401(k) might better suit your needs. The annual individual contribution limit for 401(k)s is $20,500, or $27,000 for those older than 50 in 2022. This limit applies only to the funds you contribute yourself; it doesn’t include whatever your employer decides to contribute on your behalf.
Solo 401(k)
Whether you’re a self-employed worker or you own a small business with your spouse, a Solo 401(k) offers a tax-advantaged way to save for retirement. With a Solo 401(k), you play the role of both employee and employer, which means you can make contributions for yourself and on behalf of your company. This plan brings with it a relatively high annual contribution limit of $61,000, or $67,500 if you’re old enough to qualify for catch-up contributions. Similar to a standard 401(k), the owner can choose between a opening traditional or Roth account. That way, you can either defer taxes to save money right now or receive tax-free money during retirement.
Health Savings Account (HSA)
Health savings accounts (HSAs) aren’t technically retirement accounts, but they can still prove invaluable in the pursuit of your retirement goals. The primary function of an HSA is to help people save for healthcare expenses by providing tax-advantaged growth for the investments within the account. They are known as Triple Tax Free as the funds committed to the account are tax-deductible and then grow tax-free until you need to withdraw them to cover medical costs. Withdrawals can be made at any time and are also tax-free–so long as they’re used to pay for a qualifying healthcare expense.
Fidelity projects that the average 65-year-old couple in America will need to spend approximately $300,000 on medical care over the course of their retirements, and it’s likely that we’ll see this number continue to rise. Investing in an HSA could go a long way toward lessening the financial burden of future medical expenses, and it’s the most tax-efficient vehicle for healthcare savings. For many individuals with strong cash flow, a great planning strategy is to fully fund the HSA but NOT use it for current medical expenses. This allows the HSA the ability to grow and compound tax-free for use later in life when medical expenses will likely be larger! But the benefits don’t stop there. Once you turn 65, you can use your HSA funds however you’d like—not solely on medical costs—without having to pay a penalty or fee. However, you’re still required to pay income taxes on your distributions as you would with a tax-deferred investment account like a traditional IRA. The annual contribution limit for HSAs is $3,600 for individuals and $7,200 for families.
Taxable Brokerage Account
If none of these plans sound appealing to you, or if none is sufficient to meet your retirement planning needs on its own, there’s always a taxable brokerage account. Many opt for a brokerage in addition to their tax-advantaged retirement account in order to save more or enjoy greater flexibility with their investments. Bear in mind that these accounts aren’t afforded any of the special tax breaks as the retirement accounts discussed previously, and you must pay capital gains taxes on any income you earn. They can, however, be an integral part of a retirement income strategy that pairs retirement account withdrawals which are taxed as income (unless Roth) withwithdrawals from a taxable brokerage account where the tax would only be on realized gains and that tax can be as low as 0.
Final thoughts
Remember that the contribution limits for IRAs, 401(k)s, and HSAs are independent of one another, so there’s nothing keeping you from investing in more than one of these accounts at once if you choose to. In fact, many find that some combination of the above savings plans can better suit their needs.
No matter which account, or accounts, you use in your retirement plan, consider making contributions as often as possible. It can be difficult to set aside money from each paycheck, especially early on in your career, but small investments today can add up to a more substantial sum by the time you’re ready to retire. This is the power of compound interest. Take this example – a Roth IRA funded with a yearly $6,000 contribution for 30 years with yearly growth of 8% would be valued at over $740,000!
If you’re interested in discussing your retirement saving options, reach out to a Financial Planner at Ausperity Private Wealth.
Securities offered through Sanctuary Securities Inc, Member FINRA, SIPC Advisory services offered through Sanctuary Advisors, LLC. A SEC Registered Investment Advisor. Ausperity Private Wealth is a DBA of Sanctuary Securities, Inc. and a DBA of Sanctuary Advisors, LLC. Do not transmit orders regarding your Sanctuary Securities, Inc. account(s) or Sanctuary Advisors, LLC account(s) via e-mail. Sanctuary Securities, Inc., Sanctuary Advisors, LLC, and Ausperity Private Wealth will not be responsible for executing such orders and or instructions.
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