Savings Tips for 2021

​2021 is finally here!  We all tend to feel like we are starting with a clean slate as we kick off the new year.   It feels like a new beginning...

From a financial perspective, it is a great time to take stock of your family’s current savings plan and ask yourself if there is room to save more or if you are missing opportunities to save in a  more tax-efficient way.  Here are a few of our favorite tips that are often overlooked.

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Health Savings Accounts (HSA)

The HSA is a government-regulated savings account that is funded with tax-deductible funds. The HSA is often overlooked because it is misunderstood. The HSA is available to those with high deductible health insurance plans (HDHP) that qualify for an HSA (it should be indicated on your plan).  This includes plans where the deductible is not less than $2800.  An HSA offers a multitude of benefits.

• The HSA is portable.  If you leave your employer your account travels with you, whether your next job includes a high deductible plan or not.
• Unlike an FSA (flexible savings account) the balance of your HSA rolls over every year and accumulates.  An HSA cannot be used if an employee is using an FSA.
• The balance is investable, so finding the right provider is important.
• It provides a “triple” tax advantage.  
  • It is funded with pre-tax dollars
  • The funds grow tax-free
  • Withdrawals for qualified expenses are tax-free
• You can make a once-in-a-lifetime transfer up to the allowable annual limit from your IRA (traditional or Roth) to your HSA.
• The Cares Act permanently expanded purchases eligible for HSA reimbursement to include over-the-counter medications, as well as menstrual products.
• If you accumulate a significant balance in your HSA, it can be used like a traditional IRA in retirement.  In other words, it stays investable and withdrawals after 59 ½ are subject to ordinary income tax.

For 2021, the maximum contribution amounts are $3,600 for individuals and $7,200 for family coverage. If you are 55 or older, you can add up to $1,000 more as a catch-up contribution.

Roth IRAs

Roth IRAs offer a number of savings advantages for income-earning young adults and retirees, in particular.  Let’s revisit the specifics of the Roth IRA.

• Funds deposited into a Roth are after-tax dollars (unlike a 401k or traditional IRA) which are both funded with pre-tax dollars.
• Like a 401K or IRA, funds grow tax-free.
• Withdrawals of the contribution amount from a Roth can be made once you have had a Roth IRA account open for 5 years, tax-free and penalty-free if needed.  
• Earnings withdrawals from a Roth IRA are penalty-free if the account holder is 59 ½.
• Contributions can be withdrawn at any age for qualified college expenses and up to $10,000 for a first-time homebuyer.
• Income limits for a Roth IRA in 2021 are $124,000 for a single and $196,000 for married couples filing jointly.

Roth IRAs For Soon to be Retired and Current Retirees

I’m sure you are seeing plenty of articles about Roth conversions. This is because our federal income tax brackets are lower per the 2017 tax reform.   The benefits of a conversion include:

• Giving the taxpayer/owner control of when and how much income tax to pay.
• Current federal tax brackets are historically low right now, providing a tax incentive to move funds from a traditional IRA into a Roth IRA.  Essentially, it means prepaying the income tax at a lower rate.
• Again, funds in the Roth IRA grow tax-free and are tax-free upon withdrawal.
• Transfers from a traditional IRA  can be done gradually so the tax liability can be spread out over the years.

In addition, Roth IRAs can be excellent college funding tools because whatever is unused for qualified college expenses can then be used for retirement without a penalty or taxes (unlike 529 plans, where unused funds that are withdrawn are subject to a penalty and taxes).

Roth IRAs For Young Adults

Getting an early start on savings is one of the keys to building wealth for young adults (teens included) as long as they have earned income.  Some young adults can fund both a 401k and a Roth IRA.  As we mentioned above, income limits for 2021 are $124,000 for singles and $196,000 for married couples filing jointly.

For those who are employed and have a 401K at work, it is important to first make enough of a contribution to their 401K to receive their employer’s matching contribution, if there is one.  Depending on the amount of disposable income available, funding a Roth IRA allows you to save towards retirement, but will also permit you to withdraw up to $10,000 to make a first-time home purchase.

529 Plans

529 plans are the workhorse savings accounts of college funding.  First introduced in 1996, they provide a tax-advantaged vehicle for college funding.

529 plans vary by state.  Each state may provide its own plan along with its own tax benefits.  For instance the Brightstart plan in Illinois, allows tax deductible contributions to their plan of up to $10,000 per tax year for an individual or $20,000 for a married couple.
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Other benefits include

• Earnings grow tax-free.
• Unused funds can be transferred to other beneficiaries.
• Withdrawals for qualified college/post-high school education expenses are free from federal tax.
• The federal tax law change of 2017 now allows for withdrawing up to $10,000/year towards private K-12 school tuition.  Not all states align with this, so you will want to check your state’s rules.
• 529 plans are attractive to grandparents who can gift up to $15,000/year per grandparent, or can accelerate their gift up to $75,000 that would cover the next four years’ contributions.
• Unlike a Roth IRA, there are no income phaseouts for a 529 plan.

Not only do these three types of accounts provide excellent opportunities for saving money, they do it in a tax-advantaged way, thereby stretching your savings dollars even further!

Should you want to discuss your savings plan in greater detail, please contact Jenifer at Jenifer@mosaicfi.com at your convenience.

Happy Saving!