6 tips to help ramp up your retirement savings

If you’re planning on retiring in the next few years, you may be wondering if it’s too late to make a difference in how much you’ll have available in retirement. But that couldn’t be further from the truth. We’ve put together six tips to help you ramp up your retirement savings.

1. Catch-up contributions

If you’re 50 or older, you can make “catch-up” contributions to your tax-deferred retirement accounts. For instance, in 2023, you can put an additional $1,000 a year into an individual retirement account (IRA) above the $6,500 limit for a total contribution of $7,500. Likewise, for a 401(k), you can surpass the $22,500 limit by adding an extra $7,500 for a maximum contribution of $30,000. 

2. After-tax contributions

If you’re already “maxing out” your 401(k), including your $7,500 catch-up contribution, your employer might allow you to make “after-tax” contributions. In 2023, the IRS allows you to put a total of $66,000 (or $73,500 if you’re 50 or older) into your 401(k), which includes your pretax and Roth contributions, your after-tax contributions and any contributions from your employer. Your after-tax contributions, like the rest of your 401(k), can grow on a tax-deferred basis, but you’ll pay taxes on the earnings when you start taking withdrawals. (If you’re younger than 59½, you may also have to pay a 10% early withdrawal penalty.)

3. Roth conversions

If your plan allows it, you may be able to convert your after-tax 401(k) dollars to Roth dollars through an in-plan conversion or a rollover to a Roth IRA. You won’t owe taxes on the after-tax contributions because you already paid taxes when you contributed the money, but any earnings on the after-tax contributions will be subject to taxes. The benefit, though, is that any future earnings growth will be distributed tax free. 

And, speaking of a Roth IRA, if you want to contribute the full amount allowed in 2023 ($6,500 for those 49 and under or $7,500 for those 50 and older), your modified adjusted gross income (MAGI) must be less than $138,000 if you’re single or $218,000 if you’re married and filing jointly. Allowable contributions begin to be reduced above those amounts, phasing out entirely when your MAGI reaches $153,000 (single) or $228,000 (married, filing jointly).

4. Backdoor Roth IRA

If your earnings exceed the Roth IRA limits, you can create what’s known as a “backdoor Roth IRA.” This isn’t actually an official type of IRA, but rather, a strategy for taking advantage of the benefits offered by a Roth IRA, such as the potential for tax-free earnings distribution, no mandatory withdrawals (technically called required minimum distributions, or RMDs) and greater flexibility in managing your taxes in retirement.

To create this backdoor arrangement, you make nondeductible (after-tax) contributions to a traditional IRA and then convert your contributions to a Roth IRA. Since the contribution is after-tax, you won’t pay additional taxes on the conversion of the contribution; however, any earnings on the contribution will be subject to taxes. Additionally, if you have pretax dollars (deductible contributions and earnings) in any IRA, these dollars, when converted to a Roth IRA, will be fully taxable in the year of the conversion. This strategy tends to work best for individuals who don’t already have pretax assets in an IRA because your conversion will include a proportionate share of pretax and after-tax dollars. You may want to consult with your tax advisor to determine when, or if, such a move makes sense for you.

In any case, if you earn too much to contribute to a Roth IRA, but you choose not to use the backdoor strategy, you may still benefit from making nondeductible contributions to a traditional IRA. Like after-tax contributions to your 401(k) plan, the earnings on nondeductible IRA contributions can grow tax deferred.

5. Health savings account (HSA)

Once you retire, health care will likely be one of your largest expenses – so, if you have a health savings account (HSA) available through a high-deductible health plan, you may want to take advantage of it. In 2023, you can put up to $3,850 in an HSA if you’re single or $7,750 for family coverage. Since you contribute pretax dollars to your HSA, your earnings grow tax free, and your withdrawals are tax free, provided they’re used for qualified medical expenses. HSAs can also provide greater flexibility in managing your taxes in retirement since withdrawals used for qualified medical expenses don’t increase your taxable income. If you don’t need your HSA assets for medical expenses, withdrawals for nonmedical expenses are taxed just like a traditional IRA, starting at age 65. (Withdrawals used for nonmedical purposes prior to age 65 are subject to an additional 20% penalty.)

Many people, though, aren’t getting the most out of their HSA accounts. In fact, only 9% of HSA account holders invested part of their HSA balance, according to a recent Employee Benefit Research Institute study. The remaining 91% kept their full balance in cash, ignoring the mutual fund–type vehicles available to them in their plan and thus depriving themselves of the growth potential offered by these investments. As discussed above, it can benefit you to save your HSA assets for retirement, but if you need these assets to pay for current medical expenses, one possible move is to keep enough cash in your HSA to cover your annual health insurance deductibles and invest the rest.

6. Annuity

Even if you’ve contributed the maximum amounts to your IRA and 401(k), including after-tax contributions, you may still have income you’d like to invest for retirement. Consider purchasing a nonqualified annuity, which can be structured to provide you with a lifetime income stream. You can choose either a fixed annuity, which provides a guaranteed interest rate, or a variable annuity, which gives you the chance to invest in professionally managed subaccounts. Annuities offer tax-deferred growth potential, meaning you won’t pay taxes until you start taking withdrawals.

Bonus Tip

For more information regarding these tips to boost your retirement accounts, consider reaching out to both your Edward Jones financial advisor and your tax professional.