Time flies! Before you know it, retirement is around the corner. If you feel you’re behind on your retirement savings, it’s important to start making catch-up contributions. This post will guide you through the best strategies to do so.
Max Out Your 401(k) or 403(b) Plan
One of the most effective ways to catch up on retirement savings is to maximize contributions to your 401(k) or 403(b) plan. In 2023, you can contribute up to $22,500 a year. If you are age 50 or older, you’re allowed to contribute an additional $6,500 per year as a catch-up contribution.
Take advantage of these limits. Try to contribute the maximum amount if possible. The tax benefits alone make this a wise move.
Contribute to an Individual Retirement Account (IRA)
An IRA is another excellent vehicle for retirement savings. You can contribute up to $7,500 per year. If you are 50 or older, you can make an additional catch-up contribution of $1,000 per year.
Choose between a traditional IRA and a Roth IRA based on your income and tax situation. A traditional IRA allows you to deduct contributions from your taxable income. On the other hand, a Roth IRA offers tax-free growth and tax-free withdrawals in retirement.
Open a Health Savings Account (HSA)
An HSA is a fantastic tool for retirement savings. Contributions to an HSA are tax-deductible, grow tax-free, and can be withdrawn tax-free for medical expenses. The money in an HSA can be used for non-medical expenses after age 65, although it will be taxed.
In 2023, you can contribute up to $3,850 for individual coverage or $7,750 for family coverage. If you’re 55 or older, you can contribute an extra $1,000 as a catch-up contribution.
Save More in a Taxable Investment Account
If you’ve maxed out your tax-advantaged retirement accounts, consider a taxable investment account. This type of account doesn’t offer the same tax benefits as 401(k)s, IRAs, or HSAs. But it does provide more flexibility because there are no restrictions on when you can withdraw your money.
Remember to prioritize tax-efficient investing to minimize the tax burden. This can be achieved by holding investments that generate qualified dividends or long-term capital gains, which are taxed at lower rates than ordinary income.
Reduce Your Expenses
Lowering your expenses can free up more money for retirement savings. Look for areas where you can cut back. This might mean dining out less, canceling unused subscriptions, or downsizing your home.
Increase Your Income
Lastly, consider ways to boost your income. You could ask for a raise, switch jobs, start a side business, or rent out a room in your home. More income means more money to put toward retirement.
Remember, it’s never too late to save for retirement. The most important thing is to start now and take advantage of any catch-up contributions you can make. A financial advisor can help you create a plan that’s right for you.