Saving for retirement is difficult. It is even more difficult understanding the different types of savings accounts available to individuals and families. The below is a basic framework I follow when saving for retirement. Please review your financial situation before following any saving strategy.
Health Savings Account
I believe a Health Savings Account is the best savings vehicle for retirement. If you are enrolled in a high deductible Health Care plan, you are able to contribute pre-tax dollars to a savings or investment account. The contributions can grow tax free and distributions can be taken tax-free. The funds can grow over time and be used for qualifying medical expenses in retirement. If you do not need the funds for medical expenses, at age 65 you are eligible to use the funds for any expense. You will be have to pay ordinary income taxes on the distribution. For 2022, individuals can contribute $3,650 and families can contribute $7,300.
Most employers offer a 401(k) plan to employees. As of 2022, employees are able to contribute $20,500 to a 401(k). This contribution is made pre-tax. When you take distributions from a 401(k), you will have to pay ordinary income taxes on the distribution.
Roth IRA Contribution
Single individuals can contribute $6,000 to Roth IRA in 2022 if their Modified Adjusted Gross Income is less than $144,000. If you are married and filing jointly, your Modified Adjust Gross Income needs to be less than $208,000 to make a Roth Contribution. Backdoor Roth IRA contributions are available for taxpayers above the Modified Adjusted Gross Income limits.
Any excess cash can be saved in a taxable investment account. You do not receive any tax benefits, but you are saving for retirement and hopefully benefitting from the power of compounding.
The above is a general savings framework I follow. Please consult your financial advisor to understand the best savings strategy for your situation.