Investing can make you a lot of money, but usually, you have to share a cut of your returns with the government. Talk about a buzzkill.
Fortunately, there are ways to control how much Uncle Sam takes from you, and you don’t need to be an expert investor to make use of them. Here’s one strategy that can help just about anyone keep more of their money for themselves.
Where should you stash your savings?
One of the first decisions an investor must make is where they’re going to stash their funds. There are a few options, and each has its own pros and cons.
A taxable brokerage account doesn’t impose any limitations on what you can invest in, and you can contribute as much money as you have available to you. There are also no government restrictions on when you can withdraw the funds. But these accounts don’t offer the same kinds of tax breaks as retirement accounts.
Retirement accounts either give you a tax deduction this year or tax-free withdrawals in retirement, depending on the type of account you choose. This can help you hold onto more of your savings compared to paying taxes when you make your contributions and when you take your withdrawals, as is the case with taxable brokerage accounts. But you’re limited in terms of how much you can stash in a retirement account each year. Some retirement accounts, like 401(k)s, also restrict what you can invest in.
While both of the account types above can be smart places to stash some of your savings, there’s one option that’s even better.
Try this triple tax-advantaged account instead
Health savings accounts (HSAs) are technically meant for holding medical savings, but they’re actually great retirement accounts too. Contributions to these accounts give you a tax break today, and if you withdraw the funds at any point to help you cover a medical expense, you won’t owe any taxes on them at all.
You can make nonmedical withdrawals too, though you will pay taxes on these, plus a 20% penalty if you’re under 65. But you can also leave the money alone if you don’t need it. The government won’t ever force you to take funds out of your HSA like it will with most other retirement accounts. That means you can keep your money invested as long as you’d like.
It’s worth noting that not all HSA providers enable you to invest your funds. Some keep your money stored in a savings account where it earns a modest interest rate. There’s nothing wrong with this, but if you want to get the most out of your HSA, you should look for a provider that will enable you to invest your funds just as you could in a retirement account.
How to get started
If you’d like to contribute to an HSA, you must first make sure you’re eligible to do so. You need to have a high-deductible health insurance plan. That’s one with a deductible of $1,400 or more for an individual or $2,800 or more for a family.
If you have a qualifying insurance plan, you can open an HSA with any provider you choose, but it might be worth checking to see whether your employer offers one first. If your company does, consider using its account. You might be able to automatically defer a percentage of each paycheck to your HSA, and a few companies even offer an HSA match.
Individuals may contribute up to $3,600 in 2021, while families may contribute up to $7,200. These limits will rise to $3,650 and $7,300, respectively, for 2022. Be mindful of these shifting limits over time, as you might be able to stash even more money in this account in future years.
It’s totally fine to use your HSA funds to cover some of your medical expenses in the near term, but if you plan to stash retirement funds here, it’s important to distinguish between your retirement and your medical savings. Try to avoid spending your retirement savings if you can, so you don’t accidentally shortchange yourself.
Given the HSA’s low contribution limits, you may need to pair it with some of the other accounts discussed above to save as much for retirement as you’d like. But you shouldn’t let that stop you from keeping some of your savings here if you have access to an HSA. No other account can match it in terms of flexibility, and its many perks make it a valuable asset during your working years and in retirement.
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