If you find your savings falling short, you have options that can help close the savings gap. For information and help regarding tax planning specific to your situation, consult your tax professional.
Save for medical bills and retirement in a health savings account (HSA)*
An HSA is a tax-advantaged medical savings account available to people enrolled in a high-deductible health care plan. It’s potentially a great long-term savings vehicle to supplement your 401(k) savings due to its tax-efficient structure:
- Contributions to an HSA aren’t taxable
- Earnings within an HSA account grow tax-free
- Distributions for qualified expenses aren’t taxed¹
Until age 65, an HSA can only be used, without penalty, to pay for qualified medical expenses. But once you reach 65, this account can be used not just for medical expenses (which would be tax-free withdrawals), but also for anything else you choose to spend it on (taxable as ordinary income).
*If you have an HSA-eligible health insurance plan.
WFAM does not offer HSAs.
Make catch-up contributions
If you’re age 50 or older, you can take advantage of catch-up provisions to contribute more to your 401(k) and HSA plans. In 2019, those age 50 or older can contribute, pretax, an additional $6,000 and $1,000, respectively, to their 401(k) and HSA.
Research shows that this is a more powerful method of increasing a person’s standard of living after retirement. For every year that retirement is delayed, reduce your savings target by 0.7 times your final preretirement income.²
Consider after-tax 401(k) contributions, if available
Boost your savings by taking advantage of after-tax contributions, if available, in your employer’s 401(k) plan. Although for 2019 the limit for pretax, tax-deferred contributions is $19,000, the total contribution limit when including after-tax contributions is $56,000.
That won’t reduce your taxable income, but the earnings on after-tax contributions will grow tax-deferred until you take a distribution. You can also convert that money to a Roth 401(k). Here’s the advantage of doing so: Earnings from an after-tax 401(k) are taxable when distributed, but earnings from a Roth are distributed tax-free.
Delay taking Social Security
Working longer is even more powerful when combined with waiting longer to start taking a Social Security benefit. Delaying the start of Social Security benefit payments increases the monthly payment amount by roughly 8% every year, up until you reach age 70.³