Question: Annie in Ft. Thomas: I have a 401(k), HSA, and an IRA. Should I be prioritizing one over the other? It’s hard to know which ones are more important to save in.
A: Technically, they’re all important to save in (you likely knew we would probably say something like that, didn’t you?) – but we understand your frustration. There are a lot of different types of accounts available for retirement, and only so much money to go around. So, yes, there’s definitely an advantage to thinking through your accounts and saving in a certain order.
Generally speaking, here’s how we like to think about something like this:
- Your first priority should always be to save in your 401(k) – if you get a match. And make sure you’re saving enough to get the full match.
- Next up, save some in your Health Savings Account (HSA). This offers triple-tax benefits for short-term and, even more importantly, long-term healthcare expenses. Plus, once you turn 65, it essentially turns into a de facto 401(k).
- Then, save in your IRA (you could even consider also opening a Roth IRA to get some tax-free growth).
- Lastly, while you don’t mention any taxable brokerage accounts, these are great options as well if you still have some money to put away.
Now, what if you don’t get a 401(k) match? While that’s actually fairly uncommon these days, it does happen. In this case, your 401(k) can still be your top priority since the tax-deferred benefits (and high contribution limit) are advantageous for retirement planning. But it’s not a ‘slam dunk.’ Take a closer look at the other aspects of your company’s plan. If the fees are high or the investment options are limited, it could potentially make sense to prioritize your HSA and IRA over your 401(k). A fiduciary advisor can help you sort through your options in more detail.
Here’s The Allworth Advice: Ideally, the amount of money you save – whatever the combination – should total 20 percent of your take-home pay. If you aren’t there, work toward increasing that percentage every year.
Q: C.M. in Fairfield: I lost my job because of COVID. Do I still need to file a tax return?
A: Possibly. What this really comes down to isn’t your employment status but, instead, your age, tax filing status, and 2020 income. According to the IRS, a single filer younger than 65 is required to file a return if they made more than $12,400 ($24,800 if married and filing jointly). For a single filer age 65 or older, this threshold increases to $14,050 ($27,400 if married filing jointly and both spouses are 65 or older, or $26,100 if married filing jointly and one spouse is 65 or older).
A few more important notes: If you saw a significant drop in income due to your job loss, you might be eligible for deductions and credits that you didn’t qualify for in previous years. And you should file if you didn’t receive all the stimulus money you were due. Additionally, to many people’s surprise, unemployment benefits are taxable on both the federal and state levels – though the American Rescue Plan passed earlier this month included a provision that waives taxes on the first $10,200 of unemployment benefits for individual filers ($20,400 if married filing jointly).
The Allworth Advice is that if you’re in doubt, file a return. And we highly recommend consulting a tax professional before the new May 17th deadline if you have more questions. 2020 was a challenging year, catapulting many of us into situations we’ve never experience before. A trusted expert can be a lifesaver during such times.
Every week, Allworth Financial’s Amy Wagner and Steve Sprovach answer your questions. If you, a friend or someone in your family has a money issue or problem, feel free to send those questions to email@example.com.
Responses are for informational purposes only, and individuals should consider whether any general recommendation in these responses is suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional adviser of his/her choosing, including a tax adviser and/or attorney. Retirement planning services offered through Allworth Financial, an SEC Registered Investment Advisor. Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Call 513-469-7500 or visit allworthfinancial.com