Many people don’t realize there are additional opportunities to diversify their portfolios andmaximize their money beyond contributing to employer-sponsored retirement accounts. Whileyour 401(k) or 403(b) are vital vehicles for your future retirement, it’s a good idea to exploreadditional options. Some options are helpful tools to work toward your retirement goals, andothers raise red flags.
Additional Savings Options to Consider
Health Savings Accounts or HSAs
Health care is the largest expense retirees have. In 2022, a 65-year-old couple can expect to spend an average of $315,000 in health care and medical expenses in their retirement. That’s 5% higher than last year. If you have access to a Health Savings Account, you can capitalize on the triple tax advantages.
- The money you contribute to an HSA are pre-taxed dollars and lowers your taxable income
- As the amount in your HSA compounds, you are not taxed on the growth.
- When you make qualified withdrawals for medical expenses, you are not taxed on the withdrawal.
And when you reach age 65, you can take HSA withdrawals without penalty for any purpose. Be mindful that withdrawals for medical expenses will be tax-free, but withdrawals for non-medical expenses may be taxed.
Roth IRA
Roth IRAs are funded with after-tax dollars to generate tax-free withdrawals in retirement. Although you are paying taxes on the money upfront, you will be decreasing your taxable income in retirement. Many people find it advantageous to fund a Roth IRA now while tax brackets are at historic lows and have tax-free income in retirement when tax brackets could potentially be higher. If you have a traditional IRA or a 401(k) from a previous employer, it might make sense to complete a Roth Conversion while tax brackets are lower. A Roth conversion now gives you the potential to capitalize on tax-free upside gains while markets are down.
Fixed Annuities
People have traditionally been hesitant when it comes to annuities. Recently, they’ve become less afraid of annuities, and it shows! Annuity sales in 2022 surpassed their all-time high in 2008. Annuities often get a bad rap, but when you understand the different types, they can be helpful savings tools. An annuity is an agreement between you and an insurance company. You provide the funds to receive a consistent payment immediately or on a future date. Fixed annuities offer both a guaranteed rate of return and steady payments to the owner. With guaranteed payouts for your lifetime or a set period time, you can customize distributions to your unique situation and retirement income strategy. The goal of this type of investment is to chase accumulation and growth.
Savings Options That Raise Red Flags
Variable Annuities
This type of annuity subjects your investment to market risk. Not only will your investment decrease in value if the market goes down, but you are also paying fees. In these types of investments, fees can easily hide when the market is doing well. But when the market is down, the fees will be more noticeable. You may be better off investing in the market with options that have lower fees.
Real Estate Investment Trusts or REITs
Real Estate Investment Trusts are a way for people to invest in real estate without having to be a landlord. REITs traditionally perform well in a low-interest rate environment. In 2022, we’ve seen the Federal Reserve raise interest rates several times, making REITs a riskier investment. Before investing in a REIT, make sure you understand how the investment works and know what you are investing in. And be cautious. We’re seeing a lot of REITs not allowing people to divest right now, making that money illiquid.
Before making any major investment decisions, make sure you meet with a financial professional. At Asset Preservation Wealth & Tax, we work closely with our clients. We create a plan that addresses all of their retirement needs and work with them to navigate any questions they may have and build the retirement they’ve dreamed about. Set up a meeting with us today, and follow us on Facebook, LinkedIn and Twitter.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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