Growing your wealth takes strategy and available cash, and one of the most important decisions you’ll have to make is where to keep your money. The account you choose determines what your investment options are, when you pay taxes on your funds, and how much you can set aside each year.
But the right account for you depends on your retirement goals and what you have available. Here are some simple guidelines to help you decide where to put your money first in 2023.
Start with your 401(k) if you get a business match
Your 401(k) match is a limited time offer. If you don’t claim it by the end of the year, you won’t get it at all. Rather than take that risk, try to claim your 401(k) match as soon as you can. Once you’ve done that, you can decide if you want to continue saving in your 401(k) or use another account.
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Check with your company’s human resources department to find out how much you need to contribute in 2023 to claim your full match. Keep in mind that this might be different from what you had to set aside in 2022 if you got a raise or your employer changed their matching formula.
Try an IRA
If your employer doesn’t offer a 401(k) or yours doesn’t match, you may prefer to save with an IRA. This account gives you greater freedom to invest as you wish, which also helps you control the amount of fees you pay. And you can contribute as long as your annual income meets or exceeds your total contributions for the year.
IRAs also let you choose when you want to pay taxes on your money. Traditional IRAs give you initial tax relief, but you must pay taxes on your contributions and income in retirement. Roth IRAs give you tax-free retirement withdrawals if you pay taxes on your contributions in the year you make them. Generally, Roth IRAs are the wisest move if you think you’ll be in the same tax bracket or higher in retirement. But you may not be able to contribute directly if your income is too high.
Whichever type of IRA you choose, you’re limited to $6,500 in contributions in 2023. If you’re 50 or older, you can also make a catch-up contribution of up to $1,000. These ceilings are up slightly compared to 2022.
Or consider a health savings account
Health Savings Accounts (HSAs) make great retirement accounts, even though they weren’t designed for that purpose. But you can only contribute to one if you have a high-deductible health insurance plan. For 2023, it’s the one with a deductible of $1,500 or more for an individual or $3,000 or more for a family.
You can contribute up to $3,850 to one of these accounts in 2023 if you have an individual health plan or $7,750 if you have a family plan. All contributions reduce your taxable income for the year, and if you use the money for medical expenses at any age, it’s tax-free. You can also make non-medical withdrawals, but it’s generally not a good idea to do so while you’re under 65 because you’ll pay a 20% early withdrawal penalty plus taxes.
If you choose to save in an HSA, be sure to choose a provider that will allow you to invest your funds. Otherwise, you won’t earn much interest over the years. You can open one of these accounts with many banks and brokers. Find out about the fees associated with the account before signing up and see if you can set up automatic transfers to your HSA so you don’t have to make contributions manually.
You don’t have to choose just one
If you’re torn between a few of the accounts above, you can always use more than one. You can start with your 401(k) until you get your match, then move on to your IRA. If you max out that, you can go back to your 401(k) or save into an HSA. Think about all the options available to you and choose the ones that best fit your retirement savings strategy.
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