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Building your retirement savings is a large part of your net worth. That’s the value of what you own (your assets) minus what you owe (your liabilities). But it can be challenging to figure out the best place to put your money—and make sure it’s working for you.
If you want to maximize your tax-advantaged savings, we suggest following these steps:
1. Save up to your employer’s full company match
The first step in building your net worth is to meet your match. When you save in your plan, your employer may match your pre-tax or Roth 401(k) after-tax contributions. Matching contributions are added to your account along with your own contributions. That way, your account grows even faster.
The match may be a percentage of your contributions, a percentage of your salary, or even a specific dollar amount. If your employer offers matching contributions, be sure to contribute enough to get the max. Since matching contributions are essentially free money, they’re too good to pass up.
Please note that your employer may require you to work a certain amount of time before you're fully vested. After that, you own all the money your employer contributed.
2. Save in an HSA
If your employer offers a high-deductible health plan (HDHP) that you’re already enrolled in, a health savings account (HSA) is your second step toward increasing your net worth. In 2023, individuals can save up to $3,850 in their HSA, and the maximum family contribution is $7,750. Anyone age 55 or older can also save an extra $1,000 in their HSA each year.
HSAs offer a triple tax advantage because your contributions are pre-tax, money grows in the account tax-free, and you won’t pay taxes on money used for qualified medical expenses. And while HSAs are designed for medical expenses, you can use these savings for anything once you’ve reached age 65—similar to an IRA with income taxes being due.*
Your balance carries over from year to year—which means you won’t lose what you don’t use. Once your account reaches a certain level (set by your employer or custodian), you can invest the money. And if your employer doesn’t offer an HSA, you can open one on your own—as long as you’re covered by an HDHP.
3. Save more with pre-tax or Roth contributions
The next step in building your net worth is to max out your annual contributions. Did you know that in 2023 you can save up to $22,500 in your plan on a pre-tax or Roth basis? And if you’re age 50 or older, you can save an extra $7,500 in catch-up contributions each year.
If those amounts seem too high, save what you can. Then increase your contributions a little bit each year. Even increasing by just 1 or 2 percentage points annually can make a big difference over time.
With pre-tax contributions, the money comes out of your paycheck before it’s taxed—which means you pay less in taxes today.** But you’ll owe income taxes on your contributions and any earnings when you withdraw them later.
With Roth contributions, you pay taxes today, but potentially never again.*** That’s because you can make tax-free withdrawals of your contributions—plus any earnings—as long as you:
- Are at least age 59½ when you make the withdrawal.
- Made your first Roth contribution at least 5 years ago.
4. Save up to the max with after-tax contributions
Have you already maxed out your pre-tax or Roth contributions? Some plans offer another way to save: traditional after-tax contributions. In 2023, the maximum you can save in employer and employee contributions is $66,000 or $73,500 if you’ve already reached age 50.
These contributions are a good next step in building your net worth because they’re made with money that’s already been taxed. So when you withdraw after-tax contributions, you’ll only pay taxes on the earnings. And because you can contribute more on an after-tax basis, these contributions can quickly increase your retirement savings.
If your plan allows, you may also be able to convert traditional after-tax contributions to Roth contributions—a process known as mega backdoor Roth. When you convert after-tax contributions to Roth, you can take them out tax-free, as long as you meet certain conditions.*** Another option, if your plan allows, is rolling over your after-tax contributions to a Roth IRA later.
Having more Roth money could help lower the taxes you pay in retirement. Just remember that everyone’s situation is different, so contact a tax advisor to find out what’s right for you. Also keep in mind that you won’t receive any matching contributions from your employer for making after-tax contributions or completing a Roth conversion. And you can’t undo a Roth conversion.
5. Save in an IRA
The final step to increasing your net worth is saving in an IRA. This type of account lets you save more outside of your plan. Since you may have a couple of options here—traditional or Roth—you’ll want to consider your age, income, and tax bracket. You can even set up a backdoor Roth IRA.
And while usually intended for retirement, IRAs—especially Roth IRAs—are a great way to build your net worth. Remember, though, that there are limits on how much you can contribute each year. For 2023, it’s $6,500 or $7,500 if you’ve already reached age 50.
We’re here to help!
Deciding where to put your next dollar may seem daunting at first. Use our educational resources to choose what works best for your personal situation.
We also offer advice and money management services that can help you plan for—and achieve—your financial goals. Just don’t forget that, though increasing your net worth takes time, every step you take gets you closer to your goal.
*Taxes: You can only use your HSA for medical costs that are covered. Otherwise, you may have to pay income tax on the money you take out. And if you’re under age 65, you may also face a 20% federal penalty tax.
**Taxes: The money you take from your retirment account will be taxed as income. You may also need to pay a 10% federal penalty tax if you're under age 59½. If required by law, Vanguard will withhold some taxes for you.
***Taxes: When you convert pre-tax money to Roth, you’ll owe taxes on the whole amount. When you convert traditional aftertax money, you’ll owe taxes on ust the earnings. You should talk with a tax advisor before you do this. Later, when you take the Roth money out, you won’t owe taxes as long as you meet two conditions. First, you’re at least age 59½. Second, you converted the money at least five years earlier. If you take the money out early, you may have to pay income tax and a 10% federal penalty tax. If required by law, Vanguard will withhold some taxes for you.
Advice is provided by Vanguard Advisers, Inc. (VAI), a federally registered investment advisor. Eligibility restrictions may apply. VAI cannot guarantee a profit or prevent a loss.
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