We all know we need to save for retirement, but we also have limited funds to save. With all the different tax-advantaged retirement account options available, it can be difficult to know which ones to favor with our limited savings. Making the wrong choice could cost us higher taxes, less flexibility, or even run out of free money. Here are a few factors to consider to ensure you are getting the most out of your tax-advantaged retirement accounts:

1) Does your employer match the contributions to the pension plan?

If so, maximizing that match should be your top priority for retirement savings. Where else are you going to get a guaranteed return on your money? Don’t leave that free money on the table! Of course, you also get all the other perks from your retirement account such as pre-tax or Roth contributions and tax-deferred or non-taxable growth, possibly one-off or low-cost investment options, the ability to ‘borrow and pay the interest yourself. , and protections against creditors.

2) Have you maximized a Roth IRA?

The main advantage of a Roth IRA is that all income is tax free as long as the account has been open for at least 5 years and you are over 59 1/2 years old. (Up to $ 10,000 in income is also tax free if you have had the account for at least 5 years and are using the money to buy a first home.) Since you can access contributions at anytime and for any reason with no tax or penalty, it could double as your emergency fund. (Any income you withdraw could be subject to taxes and an early withdrawal penalty, but all of your contributions go first.)

If you already have emergency savings, you can simply contribute them to a Roth IRA up to the annual limit or use a backdoor method to bypass those limits. Just be sure to keep your Roth IRA funds in a safe and accessible place, such as a savings account or money market fund, until you have built up an adequate emergency fund (enough to cover at least 3 to 6 months of spending needed) elsewhere. . At this point, you can invest the Roth IRA more aggressively to grow tax-free for retirement.

If you don’t have emergency funds, having at least a few thousand dollars in cash reserves should be a top priority. Otherwise, you could find yourself looting another retirement account (and potentially paying early withdrawal penalties) or falling behind on rent, mortgage, or car payments in an emergency. Having to fill out a withdrawal request form to tap into your Roth IRA could also discourage you from using it for frivolous things.

3) Are you eligible to contribute to a health savings account (HSA)?

If you are enrolled in a qualified, high-deductible health insurance plan, you can make pre-tax contributions to a health savings account and use the money (and any income) tax-free for health expenses. eligible. Anything you don’t spend on health care now can usually be invested and used for any purpose without penalty after age 65 as part of your retirement savings. The money could also be used tax-free to pay for eligible medical expenses in the future, including certain premiums for health and long-term care insurance. When you consider that you will most likely have medical bills in retirement, you might even want to go a step further and try to pay for the health costs from other savings. This allows the HSA money to grow as much as possible to be used tax-free for health costs in retirement.

4) Are you eligible to contribute to a 457 plan?

This retirement account is available to many public sector employees and offers the same tax benefits and contribution limits as the 401 (k) and 403 (b) accounts. However, there is no early withdrawal penalty. This extra flexibility gives it priority over others if you are under 55.

5) Have you maximized your employer’s pension plan?

Otherwise, this should be your next priority for all of the mismatch reasons listed under # 2. You can contribute up to $ 19,500 pre-tax and / or Roth plus around $ 6,500 if you turn 50 or older this year. Even without additional matching contributions, the tax benefits can be worth it.

6) Does your employer allow additional after-tax contributions?

This is not that beneficial at first glance as contributions are after tax and income is taxed at regular tax rates when withdrawn rather than the more favorable long term capital gains rates you might get. by investing outside of the retirement account. However, you can convert the after-tax dollars into a Roth account so that they can then grow to eventually become tax-free. Some plans allow you to do a Roth conversion while you are working on it. Otherwise, you can roll it into a Roth IRA.

7) Are you investing in a tax-efficient way outside of your tax-efficient retirement accounts?

If you’ve maxed out all of your tax-efficient accounts, you can still save and invest for retirement in a regular investment account. Since your interest, dividends, and capital gains will be taxed each year, you’ll want to use this account for the investments that generate the least tax. This means individual stocks and ETFs, low turnover mutual funds and municipal bonds. Taxable bonds, high turnover mutual funds and REITs should be held as much as possible in tax-sheltered accounts. If you don’t know how to do this, it could be a good reason to hire a financial advisor or use a tax robo-advisor.

As you can see, knowing which accounts to contribute first isn’t always easy. If you want additional help in making this decision, consider consulting with a qualified and impartial financial professional. Don’t let this lead to analysis paralysis though. Contributing to a less than ideal account is always much better than not contributing at all.