If you’ve maxed out your Individual Retirement Account (IRA), company 401(k) plan, or other tax-advantaged retirement account contributions for the year, congratulations — you’ve already taken advantage of the best savings tools out there.
But don’t let that stop you from continuing to add to your retirement savings.
There are other smart, tax-savvy ways to save for retirement, says John R. Quattlebaum, Wealth Planning Strategist at Wells Fargo Private Bank. Consider the following retirement strategies:
Health Savings Account (HSA). Increasingly, these accounts are being used as supplemental retirement plans because of the tax benefits they offer, Quattlebaum says. You fund an HSA with pre-tax dollars, and money you contribute has the potential to grow tax-deferred. Withdrawals for qualified medical expenses are tax-free. After age 65, any money you withdraw for non-medical purposes is subject to income taxes only. There are no income limits, but you must be enrolled in a high-deductible health care plan to participate. According to the IRS, in 2017, you can contribute up to $3,400 to an HSA if you have an individual plan or up to $6,750 if you have a family plan. In 2018, the limits for individual and family increase to $3,450 and $6,900, respectively. (Those aged 55 and older before tax year-end can contribute up to $1,000 more per year to their HSAs as a catch-up contribution.)
Whole life insurance. If you’re at least 10 years from retirement and have a healthy cash flow and a need for life insurance coverage, a properly structured whole life insurance policy can be a helpful tool to increase your tax-free income in retirement, Quattlebaum says. He typically recommends accelerating the premium payments over the first five to seven years and then letting the money potentially grow tax-free for another five to seven years just before retirement. You get tax-free access to the policy’s cash value through withdrawals and loans.* Because the plans can be complicated and may have high fees, make sure you talk to your Wells Fargo Private Bank relationship manager before moving forward.
Deferred compensation plan. If you have access to a deferred compensation plan through your company, you can set aside a part of your annual salary or bonus to be paid out at a later date. Most companies allow you to choose from a menu of investment options. The money then potentially grows tax-deferred like a 401(k). The risk, Quattlebaum says, is that the money is not protected. If your employer enters bankruptcy, you have to line up behind other creditors to collect.
No matter which strategies you’re considering, make sure you loop in your financial team and tax accountant.
A spousal IRA. If you have earned income and your spouse doesn’t, you can still open a spousal IRA in his or her name and contribute up to $5,500 a year ($6,500 for investors age 50 or older) based on your earned income. As a couple, that means you can double your family’s annual IRA contributions. To qualify, you must be legally married and file a joint tax return. Contributions are limited to the working spouse’s earned income.
Simplified employee pension (SEP) IRA. If you’re self-employed or are a small business owner, you may want to set up a SEP IRA. Like a traditional IRA, SEP IRA contributions are tax-deductible, and investments potentially grow tax-deferred until retirement. The contribution limits on a SEP IRA are much more generous than a traditional IRA: 25 percent of your compensation with a maximum of $54,000 in 2017. Because a SEP requires you to make proportional contributions for each employee if you contribute for yourself, it’s typically best for those who are self-employed or have few or no employees.
Roth IRA conversions. If you earn too much to contribute to a Roth IRA, the IRS still allows you to roll money from a traditional IRA into a Roth IRA. You can put money into a traditional nondeductible IRA, sell shares, and then roll that money into a Roth IRA account, paying taxes on any earnings. Roth IRAs may be attractive because earnings are tax-free and withdrawals in retirement are tax-free as long as the account is at least five years old and other conditions are met. In addition, they’re not subject to the minimum annual withdrawals required by traditional IRAs. If you have other deductible IRA funds, however, the math gets a lot more complicated. Proceed with caution, Quattlebaum advises, because the IRS requires the amount you convert to be prorated over the total amount you have in all your IRAs.
Before you move forward with any of these strategies, make sure you loop in your financial team and tax accountant. “They can help you figure out which strategy is the right one for you and what steps to take,” Quattlebaum says. “You have to make sure you understand the tax impact, how it will affect your cash flow, and how it fits into your long-term plan.”
*Loans and withdrawals will decrease the policy’s cash value and death benefit.