Three tips for smarter saving

Wondering how to save more money and secure your financial future? These three savings tips are the bedrock of a stable strategy and can help you maximize your savings. Making regular contributions to a Traditional IRA, a Roth IRA or a Health Savings Account (HSA) will help you prepare for life after work. But which account should you use? The short answer is: probably a mix of all three. 

1. Get off to a successful savings start with a Roth IRA.

You fund a Roth IRA with post-tax dollars, so when you decide to withdraw from it at retirement, you don’t have to pay a dime in taxes. Roth IRAs also allow you to withdraw your contributions penalty-free at any time you want. However, you will be penalized for withdrawing any earnings before age 59^½. 

Another benefit a Roth IRA offers is that you can leave that after-tax money in your account as long as you like, with no mandatory withdrawals or “required minimum distributions,” like a Traditional IRA requires. And, unlike traditional IRAs, you can keep contributing to a Roth IRA after you have turned 70^½, if you are still working and have earned income.

2. Supplement your savings with a Traditional IRA.

With a Traditional IRA, you fund your investment with pre-tax dollars and only have to pay taxes on your money when you make a withdrawal. This is known as a tax-deferred retirement savings account, meaning your interest payments, dividends and capital gains can compound each year free from taxes. Making pre-tax contributions to a Traditional IRA, as opposed to the post-tax contributions of a Roth, means you’ll have more dollars to contribute so you can meet your retirement savings goals more quickly.

To decide between a Roth and Traditional IRA, start by looking at your income, because there are income limits for Roth IRAs. For instance, if you are married filing jointly and make less than $194,000, or are single and make less than $117,000 per year, then you can contribute to a Roth IRA.. However, if you make anything more, then you’ll need to open a Traditional IRA instead. (There may be a limit on Traditional IRA deductions if you or your spouse is covered by an IRA at work and you meet certain income levels.)

Also, consider the age you expect to retire. If retirement is a long time away and you think you’ll need to make a withdrawal before then, a Roth could be the smarter choice for investing, since you won’t be penalized for withdrawing your contributions early. The ideal path is to maximize your Roth contribution when you’re making less than the income threshold, and also contribute to a Traditional IRA if you are able. If your income ever excludes you from a Roth, contribute the maximum to your Traditional IRA. 

3. Don’t ignore the benefits of a Health Savings Account (HSA).

With an HSA, you can pay for current and future health care costs, and what you don’t spend will continue to grow tax-free. If you need to pay for a medical cost, you can use pre-tax funds from your HSA to do so, without penalty. However, if you make a withdrawal that isn’t medical-related before the age of 65, you will pay a 20% penalty, plus income taxes, on the amount of the withdrawal. Be sure to keep your medical receipts in case you are ever audited.

To open an HSA, you need to have a high-deductible insurance plan, and you can’t have other healthcare coverage (from a spouse, Medicare, etc.). If you need your HSA funds for any medical expenses, you can use them as soon as you turn 65, without tax penalty. You also have complete control of your account. So if you open it at your employer and end up leaving, you can then roll the account over to another provider. (If you choose to move your account once you’ve changed jobs, look for an account that has no monthly maintenance fees, pays high interest rates, offers investment options and has multiple ways to pay your medical bills.) Plus, if you’ve maxed out your IRA and Traditional IRA, opening an HSA will give you another path to funding your retirement savings. 

The best way to maximize your savings depends on your individual financial goals and situation, but once you’ve done your homework, you may find that opening a retirement or health savings account could be the smartest savings move you ever make.