You’ve been hearing it your entire working career: You need to save money for retirement.
It might feel like nagging, but there’s a good reason for the oft-repeated advice.
Most families between the ages of 38 and 43 have just $67,270 saved for retirement, according to the Economic Policy Institute (opens in new tab). That’s just one of countless scary stats about the bleak outlook for the average American’s retirement savings.
If you want to reach big goals like financial freedom, you need to save (opens in new tab). And probably a little more than what you’re saving right now.
There’s good news if you want to make 2018 the year you commit to increased retirement savings. The IRS recently raised the limits on contributions for a number of retirement and investing accounts.
Here’s what accounts will see the changes, what those changes are, and how you can make the most of this opportunity to build and grow your nest egg for the retirement you want.
The Accounts That Can Help You Reach Your Retirement Goals
Retirement plan accounts can include 401(k)s, solo 401(k)s, 403(b)s and a number of IRAs, including SEPs and SIMPLEs.
401(k)s and 403(b)s are extremely similar. The biggest difference? Generally, for-profit companies offer 401(k)s to their employees (opens in new tab), while tax-exempt organizations (like governments and schools) offer 403(b)s.
What if you are your company and are self-employed? In that case, you can use a solo 401(k) or a SEP IRA (opens in new tab).
All these accounts offer some tax advantages for you, the investor and saver. Those advantages can help you reach your retirement goals because you don’t pay taxes on what you put into the account in the year you make the contribution.
You only pay taxes when you withdraw the money in retirement. The big benefit to contributing to a retirement account is your money will grow on a tax-deferred basis (i.e., you don’t pay taxes on interest, dividends and/or capital gains in the current year). Additionally, it’s possible you will be in a lower tax bracket in retirement, which means you could pay less in taxes overall (opens in new tab).
But at the very least, contributing to these accounts now means you lower your tax burden today — and if you pay less in taxes right now, it could free up more money in your cash flow to save.
Another reason to use these accounts? Your employer may provide a matching contribution (opens in new tab). If you contribute 3% to your 401(k), for example, your employer may also contribute 3%. That’s like a raise, or free money!
Bonus Accounts to Know and Use: HSAs and FSAs
There are two other accounts that should be part of the conversation around tools to leverage to create the best chances of financial success. Those are HSAs (health savings accounts) and FSAs (flexible spending accounts), and they’re not designated as retirement accounts — but they can still help you reach your retirement goals.
There’s a small catch, though: Not everyone qualifies for these accounts. If you do have access to one or the other, here’s what you need to know.
HSAs offer tax advantages in three ways. The money you contribute is tax-deferred (giving you the same benefit of an account like a 401(k)). The money in your HSA can be invested, and your earnings will grow tax-free. If you withdraw and use the money in your HSA on qualified medical expenses (opens in new tab), that money remains tax-free.
To qualify for an HSA, you must have a high-deductible health plan (opens in new tab). That may or may not make sense for your financial situation. If it doesn’t, check into an FSA.
You can open an FSA with a health plan through your employer (opens in new tab). You don’t pay taxes on the money you contribute to the account, and the money you use can be tax-free, too, as long as you use it to pay for qualified expenses.
Just like HSAs and the requirement to have a high deductible health plan to use them, FSAs come with a big caveat: If you don’t use the money in your account by the end of each year, you lose it (opens in new tab).
For planning purposes, this makes an HSA much more attractive, because you can contribute the money to your account — and then leave it invested there, just as you would with an account like a 401(k) (opens in new tab). Then, when you reach retirement, you could enjoy a nest egg dedicated to covering health care costs in your old age.
Changing Contribution Limits for Retirement Accounts in 2018
All of the accounts mentioned so far will experience changes to their contribution limits in 2018 — which means more opportunities to save for you!
Here’s a breakdown of the previous limits, and the higher contributions allowed starting in 2018 (opens in new tab):
- 401(k)s and 403(b)s: You can now contribute $500 per year more. 2018 contribution limit: $18,500 (plus a $6,000 catch-up contribution if you’re 50 or older).
- SEP IRAs and solo 401(k)s: The 2018 contribution limit is $55,000, or $1,000 more than 2017.
- HSAs: As an individual, you can save $50 more per year with the new contribution limit set to $3,450. Families can save an extra $150 per year with their new limit at $6,900 (plus a catch-up contribution of $1,000 if you’re age 55 or older).
- FSAs: You can also save an extra $50 year with the 2018 contribution limits with the cap rising to $2,650.
How to Take Advantage of the Opportunity to Save More
Want to take advantage of these changes to retirement and investing in 2018? Save more for the future!
Focus on your 401(k) or 403(b) first. In other words, look to the accounts in which you receive a match or contribution from your employer. That’s free money that makes it extremely easy to increase your savings rate.
(Don’t have a 401(k)? There are still plenty of other ways to save for retirement (opens in new tab).)
When it comes to making the most of savings accounts designed to help you with health care expenses, make sure you use available funds in your FSA if you have one. Remember, you’ll lose out on the money in the account if you don’t use it year to year.
As for your HSA, consider treating this like a retirement account and use your cash flow for medical expenses today.
And again, If you can avoid dipping into your HSA and can take it into retirement with you, you’ll have a nice tax-advantaged nest egg specifically for health care expenses in retirement (which will likely be your biggest expense in your later years (opens in new tab)).
The more you save now, the easier it will be to reach your biggest financial goals — including saving what you need to retire when you want.
Taylor Schulte, CFP®, is founder and CEO of Define Financial (opens in new tab), a fee-only wealth management firm in San Diego. In addition, Schulte hosts The Stay Wealthy Retirement Podcast (opens in new tab), teaching people how to reduce taxes, invest smarter, and make work optional. He has been recognized as a top 40 Under 40 adviser by InvestmentNews and one of the top 100 most influential advisers by Investopedia.