More
people ought to know about them.
There are a number of well-known
retirement savings vehicles, used by millions. Are there other, relatively
obscure retirement savings accounts worthy of attention? Are there prospective
benefits for retirement savers that remain under the radar?
The answer to both questions is yes.
Consider these potential routes toward greater retirement savings.
Health
Savings Accounts (HSAs). People enrolled in high-deductible health plans (HDHPs) commonly open HSAs
for their stated purpose: to create a pool of money that can be applied to
health care expenses. One big perk: HSA contributions are tax deductible.
Another, underappreciated perk deserves more publicity: the federal government
permits the funds within HSAs to grow tax free. Just ahead, you will see why
that is important to remember.1,2
While 96% of HSA owners hold their HSA
funds in cash, others are investing a percentage of their HSA money. Tax-free
growth is nothing to sneeze at: an HSA owner who directs 100% of the maximum
$3,450 yearly account contribution into investments returning just 4% annually could
have an HSA holding more than $200,000 in 30 years. Prior to age 65,
withdrawals from HSAs are tax free if they are used for qualified medical
expenses. After that, withdrawals from HSAs may be used for any purpose (i.e.,
for retirement income), although they do become fully taxable.1,2
In 2018, an individual can direct $3,450 into
an HSA; a family, $6,900. Additional catch-up contributions are allowed for HSA
owners aged 55 and older.1,2
“Backdoor” Roth IRAs. Some people make too much money to open a Roth IRA.
That does not mean they are barred from having one. Anyone can convert all or
part of a traditional IRA to a Roth, and pre-retirees with high incomes and low
retirement savings occasionally do. Why? A Roth IRA offers the potential for
future tax-free withdrawals. Roth IRA owners also never have to take Required
Minimum Distributions (RMDs). A Roth conversion is typically a taxable event,
and it cannot be undone. The IRA owner may enter a higher tax bracket in the
year of the conversion, so anyone considering this should speak with a tax
professional beforehand.3
Cash value
life insurance. Permanent life insurance policies often have the capability to build
cash value over time, and high-income households sometimes purchase them with
the goal of achieving more tax efficiency and using that cash value to
supplement their retirement incomes. Cash value accounts within these policies
are designed to earn interest and grow, tax deferred. Withdrawals lower the
cash value of the policy, but are untaxed up to the total amount of premiums
you have paid. Tax-free, low-interest loans may also be taken from these
policies; unrepaid loans, though, lower a policy’s death benefit. The big risk
here? If you have an outstanding policy loan, you could potentially face huge
income taxes if you run into a situation where you must surrender the policy or
are unable to pay the premiums.4
Cash balance pension plans. Many small business owners need to accelerate the
pace of their retirement saving. A cash balance plan, when wedded to a standard
workplace retirement plan that features profit sharing, may enable a business
owner to save much more for retirement annually than the low contribution
limits of an IRA would ever allow. If contributions are very large, the yearly
tax savings linked to the plan could even reach six figures.1
The Saver’s Credit. Lastly, the federal government provides a significant
tax credit to encourage low-income and middle-income households to save for
retirement. The Saver’s Credit can be as large as $2,000 each year. Joint
filers with adjusted gross income (AGI) of $63,000 or less, heads of household
with AGI of $47,250 or less, and other filers with AGI of $31,500 or less may
be eligible for the credit, which equals either 50%, 20%, or 10% of their
annual workplace retirement plan or IRA contribution, depending on their
respective AGI level. Taxpayers contributing to ABLE accounts are also eligible
to take the Saver’s Credit, so long as they are the designated beneficiary for
that account.5
Taylor McClish may be reached at (503) 239-3060 or Taylor.McClish@cunamutual.com
This material was prepared by MarketingPro, Inc., and does not
necessarily represent the views of the presenting party, nor their affiliates. This
information has been derived from sources believed to be accurate. Please note
- investing involves risk, and past performance is no guarantee of future
results. The publisher is not engaged in rendering legal, accounting or other
professional services. If assistance is needed, the reader is advised to engage
the services of a competent professional. This information should not be
construed as investment, tax or legal advice and may not be relied on for the
purpose of avoiding any Federal tax penalty. This is neither a solicitation nor
recommendation to purchase or sell any investment or insurance product or
service, and should not be relied upon as such. All indices are unmanaged and
are not illustrative of any particular investment.
Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members. Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America.
Citations.
1
- forbes.com/sites/davidrae/2018/07/23/10-retirement-accounts-you-should-know-about/
[7/23/18]
3 - morningstar.com/articles/852597/ira-conversion-fact-sheet.html
[2/27/18]
4
-
cnbc.com/2018/08/17/this-source-of-tax-free-cash-can-sweeten-or-ruin-your-retirement.html
[8/17/18]
5
- irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit
[8/6/18]
09062018-SR-2605