Many people struggle to max out an IRA or 401(k) year after year. But what if you have the opposite problem? What if you routinely max out your retirement plan contributions and find yourself with more cash to spare?
You may encounter this scenario in 2021 if your earnings are getting a boost. That’s because IRA and 401(k) limits aren’t increasing next year. They’ll hold steady at $6,000 and $19,500, respectively, for workers under 50, and $7,000 and $26,000 for those 50 and over.
Don’t despair — you still have options for socking funds away for the future. Here are two to look at.
1. Fund a health savings account
With a health savings account (HSA), you’re technically supposed to set funds aside for medical bills only. Once you reach age 65, though, HSAs get much more flexible.
HSAs are funded with pre-tax dollars, like traditional IRAs and 401(k)s. Withdrawals can be taken at any time, and they’re tax-free as long as they’re used to pay for qualified medical expenses. Any money not used immediately can be invested, just like in an IRA or 401(k).
Up until age 65, HSA withdrawals taken for nonmedical purposes are subject to a 20% penalty. That’s twice the penalty you’ll face for an early IRA or 401(k) withdrawal. Once you turn 65, you can access HSA funds for any reason without being penalized. At that point, your HSA can serve as a general retirement savings account. Your withdrawals will be taxed, but the same holds true for a traditional IRA or 401(k).
Of course, that assumes you don’t need your HSA for healthcare alone. The average 65-year-old couple retiring in 2021 is now expected to spend $662,156 on medical bills during retirement, so you could easily end up exhausting your HSA for its intended purpose.
If you’re saving on your own behalf, you can contribute up to $3,600 to an HSA in 2021, or up to $7,200 if you’re funding an HSA at the family level. If you’re at least 55, you get an extra $1,000 catch-up contribution. The only catch is that not all health plans are HSA-eligible. Your ability to participate in one will depend on your coverage. Specifically, you’ll need to be enrolled in a high-deductible insurance plan to fund an HSA.
2. Fund a traditional brokerage account
Unlike IRAs, 401(k)s, and HSAs, traditional brokerage accounts don’t offer any sort of tax benefit for the money you put in. What they do offer, however, is flexibility.
With a traditional brokerage account, you can withdraw funds at any time and for any reason. If you decide to retire early — before you’re old enough to tap your IRA or 401(k) penalty-free — you can use the money in your brokerage account to pay your living expenses. There are no income limits associated with funding a brokerage account. Factors that may be outside your control, like the health insurance plan your employer provides, won’t dictate whether you get the option to save in one. Plus, you’ll get to set up your investments to meet your personal risk tolerance and goals.
The fact that IRA and 401(k) limits aren’t changing in 2021 won’t impact many people. If if it’s a problem for you, though, explore your options for saving outside of one of these accounts. You’ll get to put that extra money to work and enjoy more financial flexibility later in life.
