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- To save for retirement, my wife and I use a combination of four different accounts with different tax structures.
- I'm self-employed and she isn't working, so we don't have employer-sponsored retirement accounts to use.
- Instead, we rely on Roth IRAs for both of us, as well as a SEP IRA and an HSA for me - plus, we moved my old 401(k) savings to a Rollover IRA.
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Retirement may feel like it's a long way off, but it has a tendency to sneak up on people.
Many financial experts suggest saving at least 10% to 15% of your income for retirement. As a former banker, I have always made saving for retirement a priority and currently use four different accounts to save and invest for the future.
Here's an inside look at my retirement accounts and my strategy of saving for my golden years.
1. My Roth IRA
As a self-employed freelancer, I don't have the benefit of an employer-sponsored retirement account like a 401(k). I'm in charge of my own retirement savings, and I fund my Roth IRA first. A Roth IRA is ideal for younger investors who have a long time horizon before retirement.
Contributions are made with after-tax dollars, but qualified withdrawals in the future are completely tax-free. If you invest well, your investments should grow significantly in the decades leading up to retirement. Avoiding capital gains taxes on those investment gains can lead to significant tax savings.
I look for a few key features in a Roth IRA. A Roth IRA should not charge any recurring fees of any kind. As of last year, stock and ETF trades should be fee-free. It's also nice to have good customer service when you need it and great online tools for managing and researching your investments.
I'm sure to contribute the maximum each year, which is $6,000 for 2020. If you're 50 or older, you can contribute $7,000 in 2020.
2. My wife's Roth IRA
My family is in the fortunate position that my wife can stay home with our three kids full-time. When you're single, you need an income to contribute to a Roth IRA. But when you're married, one spouse's earnings count toward the limit for a nonworking or lower-income spouse.
Just because my wife isn't going to work right now doesn't mean she shouldn't get to take advantage of the tax benefits of saving for retirement. We manage all of our finances together, so we consider the $6,000 we put into her Roth IRA an important part of our retirement plan just the same as my account.
Combined, we save $12,000 every year in our Roth IRAs. That's an average of $1,000 per month. If you and your partner save $1,000 per month in a Roth IRA for 30 years, you'll end up with $2.26 million after 30 years, assuming a 10% rate of return.
3. SEP IRA
While self-employed workers don't get an employer 401(k) plan, there are some great retirement account options for people like me. Two popular options are an SEP IRA and a Solo 401(k). I didn't need the higher limits of a Solo 401(k), so I opted for an SEP IRA as a way to further boost my retirement savings.
Short for Simplified Employee Pension, a SEP IRA account is funded with pre-tax dollars. That means every dollar I contribute this year will lower this year's taxes. However, withdrawals in the future are taxable. For 2020, the contribution limit is the lesser of 25% of your compensation or $57,000.
I'm not putting away 25% or more of my pay, so I don't need the higher limits of a Solo 401(k). I contribute to this account automatically every Friday and plan to slowly increase my contributions over time.
4. HSA
While most people think of a Health Savings Account (HSA) as a way to pay for healthcare, which it is, there are some superpowers this account holds that make it ideal for retirement if you use it that way.
With an HSA, contributions and withdrawals are both tax-free. That's the most tax-advantaged account around. For withdrawals to work, however, you need to have a qualified medical expense. But there's no rule saying you can't have an expense today and reimburse yourself years later when you retire.
My HSA at Lively even allows me to enter receipts today and hold off on reimbursing myself until a later date. I do reimburse myself for some big medical bills, but always contribute more than I take out.
For 2020, the contribution limit for families is $7,100. Singles can add up to $3,550. For those 55 and older, you can contribute an additional $1,000 per year.
Bonus: Rollover IRA
A Rollover IRA is a great place to put all of your old 401(k) money. During my corporate years, I had 401(k) accounts at four different companies. When I left, I moved the balances into a single Rollover IRA.
Employer 401(k) accounts are notorious for high fees and limited investment choices. With my own Rollover IRA, I control where every dollar goes. There are no recurring fees and I can choose any stock, bond, or fund I want.
Like my other retirement accounts, this account is primarily invested in low-fee mutual funds and ETFs.
You can't make regular contributions to this type of account. However, a Rollover IRA is a great account for anyone with an old 401(k), 403(b), or 457 account lying around.
Retirement is a major financial goal, and it doesn't happen by itself. Social Security is usually enough to keep people out of poverty, but generally doesn't allow you to maintain the same standard of living you had in your working years. And with the decline of pensions, odds are you have the primary responsibility of saving for your future.
Don't take that responsibility lightly. It may be decades away, but you should make your retirement a priority today. If you do, you'll have a lot less to worry about in the future.
Eric Rosenberg is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online personal finance side hustle full time.
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