You've no doubt heard from multiple sources (including Kiplinger) that the key to retirement security is to save early and often. Thanks to the value of compound interest, even small contributions to a 401(k) or other retirement savings plan when you’re starting out will add up significantly over time.
However, there’s math and then there’s reality. Young workers have multiple demands on their finances, from student loan payments to the rising cost of child care. It’s not unusual for individuals in their twenties and thirties to put their savings on hold, or limit the amount of their contributions, until those obligations begin to diminish and they reach their highest-earning years.
But just as it’s never too late to start strength training, it’s never too late to save for retirement. Here are some strategies you can use to turbocharge your savings.
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Catch-up contributions
The easiest way to ramp up your retirement savings is to make catch-up contributions to your 401(k) or other employer-provided plan. In 2024, if you’re 50 or older, you can contribute an extra $7,500 in addition to the $23,000 maximum 401(k) contribution, for a total of $30,500. If you have a traditional IRA or Roth IRA, you can contribute an additional $1,000 beyond the standard $7,000 limit for those younger than 50, for a total contribution of $8,000 in 2024.
If your employer-provided plan offers a Roth 401(k) — and most large plans do — consider dedicating at least a portion of your catch-up contributions to that account, especially if you already have a large balance in a tax-deferred plan. Although contributions to a Roth 401(k) are after-tax, withdrawals are tax-free as long as you’re 59½ or older and have owned the account for at least five years. And you can contribute to a Roth 401(k) regardless of your income level.
By contrast, to be eligible to contribute the maximum amount to a Roth IRA in 2024, your modified adjusted gross income (adjusted gross income with certain deductions added back) must be less than $146,000 if you’re single or less than $230,000 if you’re married and file jointly. Contributions begin phasing out above those amounts, and you can’t put any money into a Roth IRA once your income reaches $161,000 if you’re single or $240,000 if you’re married and filing jointly.
In the past, you had to take required minimum distributions from Roth 401(k) plans when you reached the age that triggers RMDs for traditional IRAs and 401(k)s (currently 73). But the law known as SECURE Act 2.0, a broad package of changes to rules governing retirement and retirement savings plans, eliminated that requirement, effective this year.
Starting in 2026, some workers who want to make 401(k) contributions may have to put some of them in a Roth 401(k), whether they like it or not. A provision in SECURE Act 2.0 will require workers age 50 or older who earned $145,000 or more in the previous year to funnel catch-up contributions to Roth 401(k) plans. The change was originally scheduled to take effect this year, but the IRS postponed implementation of the rule after plan providers and employers — particularly those who don’t yet offer a Roth 401(k) — said they needed more time to prepare.
After-tax contributions
If you’ve maxed out on catch-up contributions (or you aren’t yet old enough to make them), you may want to consider making after-tax contributions to your 401(k), assuming your employer allows them. In 2024, you can save up to $69,000 in combined employee and employer contributions, or $76,500 if you’re 50 or older.
Like contributions to a Roth 401(k) (or Roth IRA), contributions are after-tax, but earnings are only tax-deferred; you’ll pay taxes on them at ordinary income tax rates when you take withdrawals. Given that, you may be wondering why you’d use this strategy instead of simply investing extra savings in a taxable brokerage account (which we’ll discuss later).
Here’s why: With a strategy that has been dubbed the “mega backdoor Roth IRA,” you may be able to convert those after-tax contributions to a Roth IRA or, if your plan offers one, a Roth 401(k). Once the money is in a Roth, earnings will grow tax-free, and withdrawals will be tax-free as long as you’re 59½ and have owned the Roth for at least five years. And you won’t be required to take RMDs from the account. “That’s the promised land,” says Ed Slott, founder of IRAhelp.com. “It’s way better off than a brokerage account.”
Now for the caveats, and there are quite a few. First, your plan must allow both after-tax contributions and what’s known as in-service distributions, which allow employees to withdraw funds from their plans while they’re still working. While the IRS permits after-tax contributions and in-service distributions, plans aren’t required to provide them. Only about one-fourth of companies allow after-tax contributions, although it’s more common among large employers.
An even bigger hurdle is the IRS nondiscrimination rule, which limits the amount some high earners can contribute to their 401(k) plans. The IRS requires 401(k) plans to pass certain tests to ensure that the plan doesn’t favor highly compensated employees over lower-paid workers. Plans are subject to two anti-discrimination tests, one that measures pretax and Roth contributions by both types of employees, and a second that measures employer matches, profit-sharing and after-tax contributions. Because highly paid employees are typically the only workers who can afford to make after-tax contributions, it’s difficult for many companies — especially small and medium-size businesses — to pass the second test, says Ian Berger, an IRA analyst with IRAhelp.com.
These restrictions don’t apply to solo 401(k) plans, which are primarily used by self-employed business owners, Berger notes. Participation in a solo 401(k) plan is limited to the business owner (and in some instances, his or her spouse), so the anti-discrimination rules don’t apply. If your plan allows it — and not all solo 401(k) plans do — you can make after-tax contributions up to the maximum allowed and do an in-plan Roth conversion or roll over the funds into a Roth IRA.
The mega backdoor Roth has been in the political crosshairs since news reports revealed that PayPal cofounder Peter Thiel used the strategy to shield billions of dollars in shares of a pre–initial public offering from taxes, potentially forever. Lawmakers have proposed prohibiting individuals from converting after-tax contributions to a Roth, but none of the initiatives have been enacted into law.
Because the mega backdoor Roth is complex — and not for everyone — consider consulting with a certified financial planner who has experience working with high-income investors to determine whether this strategy is right for you.
Brokerage accounts
(Image credit: Getty Images)
Taxable brokerage accounts are sometimes overlooked as retirement savings tools because they’re, well, taxable. But there are solid arguments for adding a brokerage account to your retirement toolkit, particularly if you’ve taken advantage of all of the available tax-advantaged accounts.
Funds invested in a taxable account are unencumbered by early-withdrawal penalties, making them a good option for someone who wants to retire early (although if you’re behind on retirement saving, that may not be realistic). You don’t have to take distributions after you reach a specific age as you do with traditional IRAs. And unlike tax-advantaged accounts, taxable brokerage accounts don’t come with annual limits on the amount you can invest.
Although gains on your investments are taxable, you can take steps to minimize the tax bill. As long as you hold investments in your taxable account for more than a year, gains will qualify for a long-term capital gains rate that’s likely lower than your income tax rate — the rate that applies to short-term gains for investments held in your account for one year or less. Most taxpayers pay 15% on long-term capital gains, and if your taxable income is low enough — in 2024, $47,025 or less if you’re single or $94,050 or less if you’re married and file jointly—you qualify for a 0% rate on long-term capital gains. (Single filers with taxable income of more than $518,900 and joint filers with income of more than $583,750 are subject to the maximum 20% rate; those with income that falls between the 0% and 20% thresholds pay the 15% rate.)
When determining how to invest funds in a mix of taxable and tax-advantaged accounts, you can lower your overall tax bill by using a strategy known as asset location. Exchange-traded funds are good choices for your taxable accounts, because many are index funds, which tend to generate less in capital gains distributions compared with actively managed mutual funds. Even active ETFs tend to be more tax-efficient than mutual funds because of the way they are structured.
Because interest payments from municipal bonds and municipal bond funds are often exempt from federal taxes — and in some cases from state and local levies — munis are also good choices for your taxable account.
Meanwhile, other bonds and bond funds are better candidates for your tax-deferred accounts because interest is taxed at your ordinary income tax rate, which could be as high as 37% if you’re earning a high income. Sheltering interest-generating investments in your tax-deferred accounts will enable you to postpone paying taxes on that money until you retire and start taking withdrawals.
Actively traded mutual funds that throw off a lot of taxable capital gains distributions are also better suited for your tax-advantaged accounts. Funds that offer the potential for a high rate of return, such as those that invest in small- and mid-capitalization stocks, are good candidates for your Roth accounts because you’ll be able to take advantage of long-term, tax-free growth.
If your goal is to leave a legacy, a taxable account could provide an important component of your estate plan. On the day you die, your investments will receive what’s known as a step-up in basis, which means the cost basis of the investments — the amount you paid for them — will be adjusted to their current market value. If your heirs turn around and sell the investments, they’ll owe little or no tax on those appreciated assets.
Health savings accounts
Health savings accounts are primarily viewed as a way to cover your unreimbursed medical expenses, but they also provide a tax-advantaged way to save for health costs in retirement.
Contributions to an HSA are pretax (or tax-deductible if your HSA is not provided through your employer), funds grow tax-free, and withdrawals are tax-free as long as the money is used for eligible health care expenses. If you have an individual health insurance plan, you’ll be allowed to contribute up to $4,150 in 2024. For family coverage, you can contribute up to $8,300. If you’ll be 55 or older at the end of the year, you can put in an extra $1,000 in catch-up contributions.
To qualify for an HSA, your health plan must have a deductible of at least $1,600 for individual coverage or $3,200 for a family plan. The plan must limit out-of-pocket expenses to $8,050 for self-only coverage or $16,100 for family coverage.
If you have enough disposable income to pay for your current health care expenses out of pocket and avoid taking withdrawals from your HSA, you can get the most out of your HSA’s triple tax advantage, says Nilay Gandhi, a certified financial planner and senior wealth adviser with Vanguard Group. As long as you invest at least a portion of your HSA funds in the stock market — an option that most large plans offer — the money will grow tax-free, and withdrawals will be tax-free as long as the money is used for qualified expenses.
You can use HSA funds to pay for medical costs that Medicare doesn’t cover, as well as monthly premiums for Medicare Part B and Part D and Medicare Advantage plans. You can also use distributions to pay a portion of long-term-care insurance premiums; the amount you can withdraw tax-free depends on your age.
Once you turn 65, you can take penalty-free withdrawals for non-medical purposes, although you’ll pay taxes on the money (non-medical withdrawals before age 65 are subject to taxes and a 20% penalty). Unlike IRAs, though, there are no required minimum distributions for HSAs, so you can allow the funds to grow throughout retirement.
Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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