How to Save Outside Your 401(k) Plan
Most Americans have access to a 401(k) plan through work. 2021 data from the U.S. Bureau of Labor Statistics indicates that 68 percent of private industry workers have access to employer-sponsored retirement benefits, though on average only about half of U.S. workers choose to participate.
Those who do participate in an employer-sponsored retirement plan may want to look at other investment options to further maximize their retirement savings. If that sounds like you and you need other ways to fund your retirement beyond a 401(k), consider these three ideas.
Health Savings Account
It’s estimated that only about two percent of people are aware of the benefits of a health savings account (HSA).
You qualify for an HSA if you have a high-deductible health insurance plan. In 2022, the IRS defines a high-deductible health plan as having a minimum deductible of $1,400 for self-only coverage and $2,800 for family coverage.
With an HSA, you can contribute $3,650 per year for a self-only plan or $7,300 for a family. Those 55 and older can make additional catch-up contributions of $1,000 per year. These are pre-tax contributions that grow in a tax-deferred investment account. Money can be withdrawn at any time and without penalty for qualified unreimbursed medical expenses. Funds continue to roll over from one year to the next.
Then, at age 65, if you haven’t used that money for unreimbursed medical expenses, funds can be used for anything, including retirement. There is no required minimum distribution like some other retirement plans.
The benefit at that point is that you only pay income tax on the growth, which would amount to an IRA or 401(k) equivalent.
Backdoor Roth IRA Contribution
Many individuals would like to contribute to a Roth IRA for its tax advantages, but their income is too high. In 2022, income limits for Roth IRA contributions are $144,000 and $214,000 for single and married filing jointly, respectively. There is a way around this.
With a backdoor Roth IRA, an individual contributes to a non-deductible traditional IRA. Then, financial advisors or wealth consultants initiate a Roth IRA conversion on that non-deductible traditional IRA. Taxes are owed on the converted funds in the year in which the conversion takes place. If there were any gains on investments in the traditional IRA, taxes will be owed on that too, so it pays to have the Roth conversion in mind when setting up the traditional IRA.
It can get relatively complicated depending on whether there are other retirement accounts and when the money needs to be accessed. Working with a financial advisor is necessary to determine if a backdoor Roth IRA conversion is an effective strategy.
Life Insurance Retirement Plan (LIRP)
When an individual has already maxed out their eligible contributions to employer plans and pre-tax contributions to other accounts, like an IRA, then a life insurance retirement plan, or LIRP, is a strategy to consider.
A LIRP is an aggressively funded life insurance policy that grows tax deferred over time. Basically, the cash value of a permanent life insurance policy holds retirement assets.
At retirement, the individual borrows or takes out loans from the account value to use as supplemental retirement income. Within the life insurance policy, they never repay the loan. Then, at death, the death benefit within the policy pays off the loan.
Essentially, the life insurance policy acts just like a Roth IRA.
If you’re young and in good health when starting a LIRP, it’s not much more expensive than other investment vehicles. This can be a good strategy for someone who already has a life insurance policy and doesn’t necessarily need the insurance protection or for someone who wants to minimize market risk in their retirement assets.
These are high-level overviews of three common but complicated investment strategies to fund retirement. There are considerations for each strategy. If you’d like to learn more about these or other investment vehicles, please reach out to Adams Brown Wealth Consultants to talk about your options.