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The first half of 2022 has not been kind to the stock market. In fact, it was the worst first half on record since 1970.
The slowdown, marked by record inflation and low consumer confidence, sent stock prices plummeting. Everything from blue chip tech stocks like Facebook and Amazon to big indexes like the S&P 500 fell, prompting many to slow down their investments.
According to the BMO Real Financial Progress Index survey published at the end of May 2022, 21% of Americans have reduced their retirement contributions. There is, however, an opportunity cost for those who do, since tax-advantaged retirement accounts have limits measured for each calendar year. And once that time has passed, there is no way to get that investment opportunity back.
If you have money to spend or want to prioritize investing for the future, consider filling these three accounts before next year.
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Invest in these three accounts before the end of the year
Health Savings Account (HSA)
To qualify for this type of account, you must have a high-deductible health plan, which is usually a good option for those who rarely see the doctor. High-deductible health plans tend to have deductibles above $1,400 for singles and $2,800 for more than two people.
As long as you have a qualifying health plan, you can easily open a health savings account. I currently use Lively and have been very happy with their HSA product.
Once you have started depositing funds into your HSA, you can do one of two things: keep the money in the HSA portion of the account and save it for eligible healthcare costs or direct the funds to a self-directed brokerage account. .
The key to this is being able to turn your account into a triple tax advantage account. Keep these three things in mind to make this tactic work for you:
- If your employer has an HSA, you can have money contributed from your pre-tax pay
- If you decide to invest the money in the brokerage portion, your money will grow tax-free
- Once you turn 65 or become disabled, you can withdraw the money tax-free as long as the funds will then be used to cover medical expenses – if you decide to use the money for other expenses, it will then be taxed at ordinary income tax levels (similar to withdrawing from a 401(k)).
It’s inevitable that you’ll have medical expenses throughout your life, so a health savings account is a great way to save for those expenses. Plus, the earlier you start, the more time you’ll have for compound interest to work for you.
HSA maximums are reviewed annually, but in 2022 the limits are $3,650 for singles and $7,300 for families — after age 55 there’s also a $1,000 catch-up addition. Be sure to maximize these amounts because once the calendar rolls over to the next year, they cannot be retroactively contributed.
401(k) retirement plan
There are many benefits when it comes to contributing to a 401(k) retirement plan. As long as you work for an employer that offers a 401(k) plan, you can contribute pre-tax dollars and grow tax-free over time. These funds will not be taxed until you start receiving distributions in retirement.
Know that there is a maximum on the amount of money you can set aside each year. In 2022, you are allowed to contribute up to $20,500, not including employer matching. People over 50 can also contribute an additional $6,500 for a total of $27,000. Once the calendar moves to the next year, that opportunity disappears.
At the bare minimum, anyone with access to a 401(k) should contribute enough to earn their employer’s match. Unfortunately, according to Vanguard, about a third of Americans don’t save enough to win the game, which means they’re essentially leaving free money on the table.
If you’re not sure what fits your employer or need more information about your employer’s retirement account program, contact your human resources department for more information.
The Roth IRA holds a special place in many investment portfolios as a tax haven for a different reason than the previous two. The aforementioned options offer tax advantages up front, while the Roth IRA goldmine happens at the end of your investment journey.
A Roth IRA is an individual retirement account that can be opened in minutes with any major brokerage such as Vanguard, Charles Schwab, or Fidelity, or a robo-advisor like Betterment. In a Roth IRA, you can choose from a wide variety of investments, and in 2022 the maximum you can contribute is $6,000. If you’re over 50, you can also get an additional $1,000 catch-up.
The best thing about this type of account is that as long as you wait until you reach the age of 59.5, all funds can be withdrawn tax-free, which means you won’t pay any fees. taxes on earnings you’ve made over the years. In fact, a few people have been able to turn their Roth IRA accounts into tax-free behemoths worth billions.
When it comes to investment deadlines, you have a bit more wiggle room – each year you’ll have until April 15 of the following year to max out the account. For example, you would have January 1, 2022 to April 15, 2023 to fill your 2022 bucket. If you are already done with this year’s contributions, you will have to wait until January 1, 2023 to start next year’s bucket.
Maximizing these three accounts can generate significant returns
Although these are the three main investment compartments that I use in my own investment strategy, it is wise to consult a financial professional to help you choose the ones that will best suit your retirement goals.
Let’s take the example of my unique taxpayer situation. If I were to max out my Roth IRA ($6,000), HSA ($3,650), and half of my 401(k) ($10,250, not including employer match), that would put me at $19,900. pension contributions for the year. If I were to contribute that much every year for 30 years, assuming an average annual return of 8%, my accounts would be worth $2,434,682 after investing just $597,000 of my own dollars.
There are many factors to consider, including taxes and changes in the cost of living, among others, but that doesn’t take away from the fact that investing for the future can be very profitable.
At the end of the line
While there are several key phrases to remember when it comes to investing, the one that applies most here is: Time in the market beats market timing. It simply means that the longer you give your money to work, the better off you will be. And with these three types of investment accounts, you have a limited time to take advantage of these tax-efficient investment accounts, so don’t wait too long.
Before you start investing, it’s a good idea to make sure you have your covered monthly expenses and set aside enough money for an emergency fund. Without an emergency fund, you may need to withdraw money from your investments to cover unexpected expenses, which could result in fees and other tax implications.
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Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff alone and have not been reviewed, endorsed or otherwise endorsed by any third party.