Many of our clients are already saving a significant portion of their incomes for retirement and other financial goals. You may already be maxing out your employee contribution and ensuring that you take full advantage of any available employer match on your 401(k).
Yet, there may be some savings ideas that you haven’t previously considered that could help you boost your plan to achieve your goals. In honor of National Savings Day, here are some additional suggestions.
Add nondeductible contributions to retirement accounts
As a reminder, some clients have access to a Roth option in their employer’s 401(k) plan, which allows them to contribute after-tax money. Others use the tax-deductible Traditional option. The limit for employee contributions to a 401(k) (or similar) account in 2020 is $19,500. There is a $6,500 “catch-up” addition for those 50 years old and over.
However, the total cap on contributions to a defined contribution plan is $57,000, including employee and employer contributions. If your plan allows, you may be able to contribute nondeductible amounts up to the limit. Not all plans will permit these additions, so check with your plan administrator.
As you know, contributions to Traditional IRAs are deductible only up to a certain income under an employer plan. Roth contributions are only permitted up to a specific income level as well.
However, if you’re above the income limits, you can still make a nondeductible addition to your Traditional IRA. Make sure you keep track of any nondeductible contributions that you add to an IRA that already has pre-tax funds in it. Remember that the $57,000 limit applies only to employer plans. You can make an IRA contribution too.
Why would you add nondeductible funds to a retirement account? They grow tax-deferred until it’s time to withdraw the funds, so you can squeeze out a bit more tax savings by making these kinds of contributions.
Open a Health Savings Account (HSA) with your employer
You’ll need to be using an HSA-qualified medical plan (high deductible) to be able to open the HSA. However, if you don’t use the money you contribute in a given year, you can roll it into the next year. Many accounts will allow you to invest the money, and it grows tax-deferred.
If you make withdrawals before age 65 for nonqualified expenses, you’ll pay taxes and a 20% penalty on the amount you take out. But as long as you use the money for qualifying expenses before age 65, you can take the money penalty-free. After the age of 65, all withdrawals are penalty-free.
Open a 529 plan with yourself as owner and beneficiary
Yes, this is a legitimate way to set up a 529 account. The funds you contribute accumulate tax-deferred. If you use your account for qualified expenses, meaning you could finally take that culinary course or go to golf school, you pay no taxes or penalties on the withdrawal. Otherwise, you’ll owe them on the gains, not on the principal you contributed.
Research credit/debit card rewards
Although credit card rewards may not be as plentiful as they’ve been in years past, you may still be able to find a card where you can earn more points for the places you tend to spend the most.
For example, if you enjoy traveling, look into travel rewards cards that provide bonus points for spending on travel-related items. These often come with additional perks like free airport lounges.
If you spend on entertainment, find a card that rewards you for that. Bear in mind that many of these credit cards come with annual fees, so make sure that you will reap the rewards before taking on a high-fee card.
Shop online for high-interest savings accounts
Here’s another opportunity to squeeze out a little bit more in savings without too much effort. Many online savings accounts offer bonuses and higher interest rates to save with them. Be aware you’re not going to find any reputable bank offering 5% or more while interest rates continue to below. However, you’ll likely see some that offer a slightly better rate than what your brick-and-mortar bank is providing.
As always, make sure you’re not paying any additional fees. They may want you to agree to keep your money in the account for a certain period or require other caveats to guarantee you the higher rate. Make sure you understand what they’re asking for to get the higher rate.
Refinance when attractive
Some of you may have done this already with your mortgage! But if not, consider whether you can negotiate to reduce interest on any of your loans. Yes, it’s theoretically possible that rates could go a bit lower, but probably not significantly lower.
If you’ve been holding off, consider what rates look like now, and determine whether you should bite the bullet.
Analyze expenses for hidden fees and anything you don’t need anymore
Many accounts in the modern world come with pages and pages of user agreements, and many people skim (or ignore) them before checking the box. However, that means that you may have unexpected fees that are affecting your bank account. They’re unlikely to be large, but even a small fee that recurs monthly for years can add up.
Periodically review your banking and credit card statements. Do all the fees make sense? You might uncover some charges that you don’t know. Investigate and determine whether they’re necessary.
Likewise, are there expenses that you no longer need? For example, if you no longer go to the gym, or have stopped reading a magazine, or got a streaming service and no longer need cable TV, eliminate them.
Go old school to get into a full savings mind set:
Bartering can be a fun way to connect with other people, especially if you have a hobby that you enjoy. You could trade teaching a second language to someone who will give you piano lessons, for example. Or bake bread in exchange for your neighbor’s eggs. There are a lot of ways to be creative here.
It’s also an excellent way to get the word out when launching a new business. You can provide your service for free or as a sample and start amassing positive reviews.
Use your library
No need to spend so much money on books when you can get them for free! Most public libraries are part of a more extensive system. If your local one doesn’t have the book you need, you can request it from another branch and then pick it up on your own.
It’s also an excellent way to cut down on your magazine subscriptions, especially when you have so many you don’t feel you can read them all.
In addition to helping you save money, an additional bonus to gardening is that it can be good exercise and help relieve stress. You’ll find that your homegrown vegetables have much more flavor than the ones you buy at the supermarket.
You can plant flowers too so that you can make beautiful arrangements in your home as well. Your local community college or other community organization probably has a gardening forum that can answer your questions and advise what grows best in your area.
Do preventative maintenance
Rather than wait until things break down, which almost always means a much bigger repair bill, take care of everything as you go. Ensure your home is in good repair to avoid having critters or mold or anything else wear away at the foundations or infrastructure. Maintain your car on a regular schedule.
Care and maintenance also extend to your self! Make sure you’re getting the proper healthcare and exams for your age. Do your best to eat nourishing food and get enough exercise to reduce inflammation, which leads to cardiovascular disease, type 2 diabetes, and others.
Don’t wait too long to get seen if something seems awry, either mentally or physically. It’s much cheaper (not to mention easier on you) to find that you need medication and get a prescription. Instead of finding out after you have to go to the hospital that you need the medication.
Want to talk about tax-savvy savings accounts? Please give us a call at 619.255.9554 or email us to set up an appointment.
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