The first half of 2022 has not been kind to the stock market. In fact, it’s been the worst first half on record since 1970.
The downturn, marked by record-high inflation and low consumer sentiment, has caused stock prices to plummet. Everything — from blue-chip tech stocks such as Facebook and Amazon to large indices like the S&P 500 — has fallen, causing many to slow down with their investments.
According to the BMO Real Financial Progress Index survey published at the end of May 2022, 21% of Americans have cut back on their retirement contributions. There’s an opportunity cost involved for those who do this, however, since tax-advantaged retirement accounts have measured limits for each calendar year. And once that deadline passes, there isn’t a way to recoup that investing opportunity.
If you have some money to spare or want to prioritize investing for the future, consider filling these three accounts before next year.
Invest in these three accounts before the year’s end
Health Savings Account (HSA)
Putting money toward your Health Savings Account, or HSA, is a solid way to begin saving for future healthcare costs. You can also use this type of account as an investment vehicle for retirement.
To qualify for this type of account, you must have a high deductible health plan, which is typically a good option for those who rarely visit the doctor. High deductible health plans tend to have deductibles above $1,400 for singles and $2,800 for more than two people.
As long as you have a qualifying health plan, you can easily open up a Health Savings Account. I currently use Lively and have been quite pleased with its HSA product.
Once you begin depositing funds into your HSA, you can do one of two things — keep the money in the HSA portion of the account and save it for qualifying healthcare-related costs or direct the funds to be invested in a self-directed brokerage account.
The key to this is being able to transform your account into a triple-tax advantage account. Keep these three things in mind to make this tactic work for you:
- If your employer has an HSA available, you can have money contributed from your paycheck pre-tax
- If you decide to invest the money within the brokerage portion, your money will grow tax-free
- Once you are age 65, or become disabled, you can pull the money out tax-free as long as the funds will then be used to cover medical expenses — if you decide to put the money toward other expenses, it will then be taxed at ordinary income tax levels (similar to withdrawing from a 401(k)).
It’s inevitable that you’ll have medical expenses throughout your lifetime, so a Health Savings Account is a great way to save up for those costs. Plus, the earlier you get started, the more time you’ll have for compound interest to work for you.
HSA maximums are reviewed each year, but in 2022, the limits are $3,650 for singles and $7,300 for families — after age 55, there’s also a catch-up addition of $1,000. Be sure to maximize these amounts since once the calendar turns to the next year, they cannot be contributed to retroactively.
401(k) retirement plan
There are many benefits when it comes to contributing to a 401(k) retirement plan. As long as you work for an employer that offers a 401(k) plan, you can contribute pre-tax dollars and will grow over time without being taxed. These funds will only be taxed when you begin taking distributions in retirement.
Be aware that there is a maximum as to how much money you can put away each year. In 2022, you’re allowed to contribute up to $20,500 — not including an employer match. Those over the age of 50 can also contribute an additional $6,500 for a total of $27,000. Once the calendar turns to the next year, that opportunity disappears.
At the bare minimum, everyone with access to a 401(k) should be contributing enough to earn their employer’s match. Unfortunately, according to Vanguard, approximately one-third of Americans aren’t putting away enough to earn the match, which means they are essentially leaving free money on the table.
If you’re not sure what your employer match is or need more information about your employer’s retirement account program, reach out to your human resources department for more information.
Roth IRA
The Roth IRA holds a special place in many investment portfolios as a tax haven for a different reason than the previous two. The aforementioned options provide tax advantages on the front end, while the Roth IRA goldmine happens at the end of your investment journey.
A Roth IRA is an individual retirement account that can be opened in a matter of minutes with any major brokerage such as Vanguard, Charles Schwab or Fidelity, or a robo-advisor like Betterment. Within a Roth IRA, you can select from a wide variety of investments and in 2022, the maximum you can contribute is $6,000. If you’re over 50 years old, you can also get an extra $1,000 catch-up.
The best thing about this type of account is that as long as you wait until you reach 59-and-a-half years old, all the funds can be withdrawn tax-free — meaning that you won’t pay taxes on gains that you’ve made over the years. In fact, a few people have been able to turn their Roth IRA accounts into tax-free behemoths that are worth billions.
As for investing deadlines, you do have a bit more wiggle room — each year, you’ll have until Apr. 15 of the following year to maximize the account. For example, you’d have from Jan. 1, 2022 to Apr. 15, 2023 to fill up your 2022 bucket. If you’re already done with this year’s contributions, you’ll need to wait until Jan. 1, 2023 to start on next year’s bucket.
Maximizing these three accounts can net hefty returns
While these are the three main investment buckets I use in my own investing strategy, it’s wise to consult a financial professional to help you decide which ones will work best for your retirement goals.
Let’s use my situation as a single tax-filer as an example. If I was to maximize my Roth IRA ($6,000), HSA ($3,650) and half of my 401(k) ($10,250, not including employer match), this would put me at $19,900 in retirement contributions for the year. If I was to contribute this much consistently each year for 30 years, assuming a 8% average yearly return, my accounts would be worth a whopping $2,434,682 after only investing $597,000 of my own dollars.
There are plenty of factors to consider, including taxes and changes in cost-of-living, among others, but it still doesn’t take away from the fact that investing for the future can be quite profitable.
Bottom line
Though there are several key phrases to remember when it comes to investing, the one most applicable here is: Time in the market beats timing the market. This simply means that the longer you give your money to work, the better off you’ll be. And with these three types of investment accounts, you have a limited amount of time to take advantage of these tax-advantaged investment accounts, so don’t wait too long.
Before you begin investing, it’s a good idea to make sure you have your monthly expenses covered and set aside enough money for an emergency fund. Without an emergency fund, you may find yourself having to take money out of your investments to cover unexpected expenses, which could trigger fees and other tax implications.
