Saving for retirement in a tax-advantaged account like an IRA or 401(k) has some real benefits. If you put money into a Traditional IRA or 401(k), your contributions will go in tax-free, shielding a chunk of your earnings from the IRS. Plus, your investment gains will be tax-deferred, so you won’t owe the IRS its cut until you start making withdrawals in retirement.
Roth IRAs and Roth 401(k)s, by contrast, don’t offer up-front tax breaks on contributions. But what they do offer are tax-free gains on the assets in your account and tax-free withdrawals during retirement.
One of the notable downsides with all of these types of accounts, though, is that you can’t just contribute as much as you want. There are limits as to how much money you can add to them each year. And each year, the government reviews those limits, and regularly adjusts them for inflation.
Right now, the ceiling for annual IRA contributions is 6,000 a year for workers under 50 and $7,000 for those 50 and over. Meanwhile, 401(k) contributions max out at $19,500 for workers under 50 and $26,000 for those 50 and older.
Next year, the annual contribution limit for a 401(k) will rise by $1,000. So in 2022, workers under 50 will have the option to add up to $20,500 to their accounts, while those 50 and over will be able to contribute as much as $27,000.
But IRA limits, surprisingly, are not going up in 2022. So if you don’t have access to a 401(k), you won’t get to increase your contributions to a dedicated retirement plan.
But that doesn’t mean you can’t sock away more than $6,000 or $7,000 for retirement next year. Here are some other options worth exploring.
Fund a health savings account
If you’re enrolled in a high-deductible health insurance plan, you may be eligible to participate in a health savings account, or HSA. These accounts are designed to let people sock away money for near-term and far-off medical expenses. Contributions to HSAs go in tax-free, and funds that aren’t needed immediately can be invested in a tax-free fashion. Withdrawals are also tax-free when used for qualified healthcare expenses.
Because HSA funds don’t expire, you could fund one next year, invest that money for the long term, and use it during retirement. Normally, HSA withdrawals for non-medical purposes are subject to a costly penalty. But once you turn 65, you can take HSA withdrawals for any reason penalty-free. The only catch is that you’ll be taxed on your withdrawals, but that’s no different from the way distributions from a Traditional IRA are treated.
Next year, you can put up to $3,650 into an HSA if you’re saving as an individual, or up to $7,300 if you’re saving at the family level. If you’re 55 or older, you can contribute an additional $1,000 on top of whichever limit applies to you.
Invest via a traditional brokerage account
When you buy stocks or other investments in a traditional brokerage account, you don’t get a special retirement-related tax break. But it’s still a good way to save more for your golden years once you’ve maxed out your contributions to your tax-advantaged accounts.
The upside of investing in a brokerage account is that your access to your money won’t be restricted. With an IRA, you would be penalized for taking withdrawals prior to age 59 1/2. And while you will be liable for capital gains taxes on your investments in a brokerage account, you can minimize those by making sure to hold investments for at least a year and a day before selling them at a profit.
The fact that IRA contribution limits aren’t rising next year is disappointing. But both HSAs and traditional brokerage accounts are terrific long-term savings and investment vehicles you can use to build up your retirement nest egg.