What Happens After I File My Tax Return
February 12, 2017
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Retirement Contribution-IRS Tax Options Explained

When you consider saving for retirement, you probably focus on 401ks, 403bs, and Individual Retirement Accounts (IRAs). While these are excellent saving vehicles because they’re tax-advantaged and offer a host of benefits, the IRS limits the amount you can contribute to them each year. Additionally, the IRS recently announced contribution limits won’t be increased in 2017. So, you are determining: What else can you do to save meaningfully for life after the 9-to-5 days end?

What are the limits?

In 2017, you can defer up to $18,000 of your salary into a 401k, 403b, or Thrift Savings Plan. This limit only applies to the amount you personally contribute; any employer match you are eligible to receive does not count against this cap. Individuals that are older than age 50 may contribute an additional $6,000 per year, raising their total limit to $24,000. If your employer offers a Roth 401k or Roth 403b, the limits are the same and integrated. You have $18,000 total to contribute—and can decide whether to use the traditional plan, Roth plan, or a combination of the two.

For Individual Retirement Accounts (IRAs), you can contribute up to $5,500 to a Traditional or Roth IRA. Individuals older than age 50 may contribute an additional $1,000 per year.

How does this benefit you?

Well, if you haven’t reached these limits yet, consider bumping up your 401k contribution percentage when you receive a raise or cost-of-living adjustment in 2017. You probably won’t notice the difference in your paycheck, but you will in your 401k balance!

If you’re already maxing out your 401k, consider establishing or contributing to an existing IRA. The IRA limits are separate and apart from 401k limits. As long as you have earned income, or you’re married filing jointly and your spouse has earned income, you can contribute to a Traditional IRA. You can even deduct the contribution if you have income of less than $62,000 ($119,000 married filing jointly), or don’t have an employer-sponsored retirement plan available to you.

The Roth IRA, because of its favorable tax treatment, comes with an extra rule—you can be determined ineligible to contribute based on your income. For 2017, if you are single with income more than $118,000 (or $186,000 married filing jointly), the amount you can contribute to a Roth IRA is reduced; if you earn more than $133,000 (or $196,000 married filing jointly), you cannot contribute at all. These income constraints do not apply to Roth 401ks or Roth 403bs if one is available to you.

If you have maxed out both your employer plan and your IRA, this means you’re already saving at least $23,500 of your annual earnings for retirement. You’re doing fine! However, with the limits not increasing this year, you may be wondering if there are any other viable options for saving meaningfully toward retirement. Luckily, the answer is yes!

What are your other retirement savings options in 2017?

Contribute to a Health Savings Account (HSA)

HSAs are only available to participants in high-deductible health care plans. Like 401ks, HSAs grow tax-deferred. If your employer offers this account, you can fund it with pre-tax contributions from your paycheck (similar to your 401k). Individuals enrolled in a qualifying plan can contribute to an HSA, too—and then deduct their contributions using IRS Form 8889. Any withdrawals for qualified medical expenses (regardless of your age) are tax-free. Plus, once you reach age 65, all non-medical withdrawals are taxed at your ordinary income tax rate (just like an IRA). Be mindful that if you take a withdrawal for a non-qualified medical expense before you reach age 65, the distribution will be subject to taxes plus a 20 percent penalty.

In 2017, you can put up to $3,400 into an HSA ($6,700 if on a family insurance plan). Individuals older than 55 may contribute an additional $1,000 per year. Whatever you don’t use toward medical expenses can be invested for and used in retirement.

If you change health care plans (or leave your employer and start working for another company that does not offer a high-deductible health care plan), you can no longer contribute to your HSA. The silver lining? Any amount already contributed before your departure stays yours. You can still spend it (without penalty) toward health care expenses—or leave it earmarked for retirement and enjoy tax-deferred growth.

Make an After-tax 401k Contribution

If you’re thinking, “wait, didn’t we already talk about Roths?”—you’re right, we did. There’s actually a third bucket of savings embedded in some employer plans. Even after reaching the $18,000 deferral limit for your 401k, some employer plans allow additional after-tax 401k contributions up to the IRS limit of $54,000 (2017). Under this arrangement, your deferral plus employer match plus additional after-tax contribution cannot exceed $54,000. Your pre, Roth, and post-tax contributions will be segregated into three different buckets under the plan.

After-tax dollars can be converted into a Roth IRA when you leave your employer, making this a great option for those who want to utilize a Roth vehicle but may not have access to a Roth 401k through their employer and aren’t eligible for the Roth IRA due to income limitations. Check with your HR department to see if this is an option for you.

Start a Taxable Investment Account

Since the availability of HSAs and after-tax 401ks depends on your employer, you may find that neither applies to your circumstances. But don’t panic! You’re not out of luck. Consider starting a taxable investment account where you have a limitless ability to save. Earmark an account specifically for retirement, opt for a long-term investment strategy, and let this money grow and compound over time. (Remember, investing always comes with risk, including possible loss of investments, so there will be some expected bumps along the way; historically, investment returns tend to smooth and trend upward over longer periods of time.) Be mindful that you will owe taxes on any income (dividends, bond interest) that your investments generate, as well as taxes on any realized gains. This is a distinct difference from the tax-deferred retirement accounts mentioned earlier. The good news? You can access this money at any time without penalty, and withdrawals are always tax-free (since you’re paying the tax as you go).

Don’t forget…

If you haven’t made saving for retirement a priority, now is a great time to start. Earlier this year, the Department of Labor proposed a new set of regulations, the fiduciary rule, that requires a broader group of financial professionals to act as fiduciary to their clients. (This means the planner is obligated to act in their client’s best interest.) This proposed rule will apply to all financial professionals providing advice about the investment decisions for retirement accounts, like your 401k and IRA. The new regulations are scheduled to go into effect in April 2017.