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How to prioritize your contributions 401 (k), Roth IRA and HSA in 2021

Forget about choosing stocks, mutual funds or ETFs that you might want to invest in. Determining the types of retirement accounts you need to fund, and in what order, can cause a severe case of paralysis of analysis entirely – especially if you are one of the lucky workers to have access to Roth IRAs, 401 (k) plans and savings health bills.

You can list the pros and cons of the 401 (k) s, HSA and Roth IRA and outline the various IRS limitations and tax implications associated with each of these accounts – and still not be closer to deciding where to place your money.

Performing a personal analysis can be helpful if it helps you cope better with your own situation. But if you prefer to start with a generally solid pension strategy for 2021

, take a look at the framework below. It gives priority to waterfall account type contributions – which means you will start at the top and keep moving down the list until you have spent all the money you have earmarked for retirement savings this year.

1. Contribute enough to your 401 (k) to maximize your employer’s match

A recent report from the Board of Sponsors of America’s Plan concluded that the average employer matching rate of 401 (k) is 5.3% in 2019. If you make $ 50,000 a year, that will be $ 2,650 in free money, which you could add an egg to your retirement nest.

Happy couple reviewing their retirement savings plan.

Image source: Getty Images.

Ask your plan administrator or human resources manager to explain your company’s matching rules, and then set your contribution rate accordingly. Some employers will match a dollar for a dollar, while others may correspond to $ 0.50 for every dollar. Either way, there will be a limit to what your employer will fund. Set your own 401 (k) contributions high enough so that by the end of the year you get every penny of the corresponding funds you have.

2. Maximize your HSA contributions

Then ask to send some money to a health savings account (HSA), if you can finance one. Their use is limited to people and families who have deductible health insurance plans, but HSAs are attractive for long-term savings because they offer triple tax benefits. Their contributions are subject to taxation, their profits are deferred from taxes, and withdrawals from them, which are used for medical expenses, are tax-free. And after you turn 65, you can withdraw money for non-medical reasons without penalty. However, these withdrawals will be taxed as regular income, just like the 401 (k) distribution.

This means that there is no risk of over-financing the HSA. If you do not use the money for medical expenses, you can use it to supplement your other retirement savings.

In 2021, you can contribute up to $ 3,600 for HSA if you have an individual health plan or up to $ 7,200 if you have a family health plan.

3. Contribute to the Roth IRA if you can

Once you have maximized your HSA, see if you qualify for the Roth IRA. Your income will be the main factor. The IRA contribution limit in 2021 is $ 6,000 or $ 7,000 if you are 50 or older. But as a single feeder, you can only contribute to the limit if you make less than $ 125,000 a year. Married archivists have to make less than $ 198,000. You can contribute a reduced amount as long as you do not make more than $ 140,000 per year as a single applicant or $ 208,000 as a married applicant.

Roth’s contributions are not taxable, but qualified retirement distributions are non-taxable. This offers good tax diversification at retirement, as the withdrawal of 401 (k) and non-medical HSAs will be taxable. Roth’s contributions are especially practical if you expect to be in a higher tax category at retirement than you are today.

4. Max. Your 401 (k) contributions

Alternatively, your 401 (k) may accept Roth contributions – and income limits would not apply there. Ask your plan administrator if you have this feature and if so, how to set it up.

In 2021, you can deposit up to $ 19,500 in your 401 (k) in Roth and regular installments. If you are over the age of 50, your contribution limit is $ 26,000.

5. Invest through a traditional IRA or standard brokerage account

After filming your employer’s entire match, increase your HSA contributions, collect money in a Roth account and reach the 401 (k) contribution ceiling, go ahead and invest in either a traditional IRA or a taxable broker account. Traditional IRAs give you some tax breaks, and while you won’t get any tax benefits with a regular taxable brokerage account, you’ll have the flexibility to use that money whenever and however you want.

Step by Step

In fact, you probably don’t have $ 25,000 or $ 30,000 to save for retirement each year. Don’t be discouraged by this. You can still create a portfolio large enough to fund a comfortable retirement. For now, aim to contribute at least enough to your 401 (k) to win your full employer match. Then, as your income increases, branch out and diversify your contributions to your various accounts. This should put you on track for the retirement you want.

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