The process of choosing a medical plan and allocating your
money among various other benefits allows you to reassess whether you are
saving enough for retirement, and in the right ways. Experts advise saving at
least 15% of your annual income for retirement. And with the array of savings
and reimbursement accounts on offer, you’ll need to decide which ones to fund,
and in what order to fund them.
Snag the match: Your
first priority should be to contribute at least enough to your 401(k) to
qualify for any employer match. This is true even if the plan’s investment
choices aren’t the greatest or if its fees aren’t the cheapest.
The vast majority of 401(k)-type plans run by Vanguard Group
offer employer-matches, with a median value of 3% of pay. More than half of
Vanguard-run plans offer Roth 401(k)s, where contributions are made after tax
but distributions can be tax-free. If your employer offers the Roth feature and
you think you’ll be paying the same or a higher tax rate in the future, you
should probably choose the Roth. The more years you have until
retirement, the stronger the case for the Roth.
One exception is if you are aged 50 or over and expect your
income to fall significantly in retirement, he says. In that case you, should
probably stick with a traditional 401(k), where contributions are made pretax
and distributions are taxed as ordinary income.
If you aren’t comfortable predicting your future tax rate,
hedge your bets and put some money in both. But pick something. The most
important thing at this stage of the game is to snag the match.
Make a triple play: For
many people, the next order of business should be to fund a health savings
account, or HSA, if one is available. This is a triple-tax-advantaged medical
reimbursement account. Contributions reduce your taxable income, money in the
account grows tax-deferred, and distributions for qualified health-care
expenses are tax-free.
Your contributions, plus any from your employer—employers
put on average $600 per employee into HSAs—can total up to $3,350 (for
individuals) or $6,650 (for families) in 2015. If you’re 55 or older (and not
yet enrolled in Medicare) you can put in an additional $1,000. If you can pay
some out-of-pocket medical expenses with other funds, you can effectively turn
the account into a medical IRA.
Money not spent in one year can be rolled over to the next,
and you can take your account with you if you change jobs or retire. If you
don’t need the money for medical care in retirement, you can spend it on
anything you like, paying only regular income tax on the distributions.
To participate in an HSA, you must be enrolled in a health
plan with an annual deductible of at least $1,300 (for individual coverage) or
$2,600 (for family coverage) for 2015.
For a growing number of employees, a high-deductible plan
coupled with an HSA—sometimes called an “account-based” or “consumer-directed”
plan—will be their only health-plan option in 2015. Others with a choice of
plans will need to decide whether the account-based variety is right for them.
Top off retirement
plans: Next, continue funding your 401(k). The limit on employee
contributions will rise to $18,000 for 2015, up from $17,500 this year. The
additional, “catch-up” contribution for those aged 50 and up will increase to
$6,000 in 2015 from $5,500 this year.
If you don’t have a Roth 401(k) option, or if you don’t like
your employer’s plan, consider funding an IRA first if you’re eligible. But
keep in mind: You can’t contribute as much to an IRA. The combined traditional
and Roth IRA contribution limit will stay the same in 2015: $5,500, plus $1,000
for those 50 and up.
You can’t contribute to a Roth if your income exceeds
certain limits, and your deduction for contributions to a traditional IRA may
be limited if you or your spouse is covered by a retirement plan at work and
your income exceeds certain levels.
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