So, you’ve decided that you’d like to save more but aren’t sure where to start as far as the type of savings vehicle? With numerous account options available for saving, it is a good idea to understand which accounts best suit your situation and financial goals. Here is a guide to help you navigate your options and make informed decisions for 2024 and beyond.
Emergency Savings Fund
An emergency savings fund provides a financial cushion during unforeseen events such as job loss or medical emergencies. Depending on your situation, setting aside three to 18 months of living expenses is essential.
Dual-income households: Setting aside three months of expenses may suffice.
Single-income households or self-employed individuals: Aim for six months of expenses.
High-income earners or entrepreneurs: Setting aside 12 to 18 months provides flexibility in job mobility and potential business opportunities.
If available through your employer, consider contributing to an Emergency Savings Account linked to your retirement plan.
Retirement Accounts: 401(k), 403(b), 457, and SIMPLE IRAs
Retirement accounts are crucial for building long-term financial security. These tax-advantaged accounts are typically employer-sponsored, and maximizing contributions is often a wise strategy.
401(k), 403(b), or 457: For 2024, you can contribute up to $23,000 annually, or $30,500 if you're 50 or older. Contributing enough to receive the full employer match is recommended.
SIMPLE IRA or SIMPLE 401(k): Contributions are capped at $16,000 annually ($19,500 if you're 50 or older). If eligible, consider increasing your contributions by 10%.
For those who have maxed out their contributions, looking into a Mega Backdoor Roth contribution is another option for tax-efficient savings.
Roth IRA and Traditional IRA
Individual Retirement Accounts (IRAs) offer more control over your investments and are an excellent supplement to employer-sponsored plans.
Traditional IRA: Contributions may be tax deductible, providing upfront tax savings.
Roth IRA: Contributions are made with after-tax dollars, but withdrawals in retirement are tax-free. For 2024, individuals can contribute up to $7,000 ($8,000 if you're 50 or older), with income eligibility phasing out between $146,000 and $161,000 for single filers and $230,000 to $240,000 for married couples filing jointly.
For high earners who exceed these limits, a Backdoor Roth IRA offers an alternative method to take advantage of Roth benefits.
Health Savings Accounts (HSA)
A Health Savings Account (HSA) provides a triple tax advantage: contributions are tax-deductible, the funds grow tax-free, and withdrawals for medical expenses are also tax-free.
For 2024, you can contribute up to $4,150 for individual coverage or $8,300 for family coverage, with an additional $1,000 catch-up contribution allowed if you’re over 55. If eligible, HSAs are one of the most tax-efficient savings vehicles available.
Flexible Spending Accounts (FSA)
A Flexible Spending Account (FSA) allows you to contribute pre-tax dollars towards healthcare-related medical, dental, and vision care expenses. In 2024, the maximum contribution is $3,200. Be mindful that any unspent funds may be forfeited at the end of the year unless your plan offers a grace period.
529 College Savings Plan
A 529 plan is a tax-advantaged account designed to help families save for education expenses. In 2024, you can contribute up to $18,000 annually per beneficiary, gift tax-free, or make a lump sum contribution of up to $90,000 and spread it over five years. Some states offer additional tax deductions or credits for contributions to a 529 plan.
Additionally, recent rule changes allow unused 529 funds to be transferred to a beneficiary's Roth IRA under certain conditions, making this a flexible tool for future planning.
High-Yield Savings and Conservative Investments
If your traditional bank savings account isn't yielding a satisfactory return, consider switching to a high-yield savings account or investing in certificates of deposit (CDs) or other conservative options. These accounts provide a higher return while maintaining liquidity and security, making them suitable for medium-term savings goals.
Taxable Brokerage Account
If you've maxed out tax-advantaged accounts, a taxable brokerage account allows you to invest in the stock market and other securities. While gains are taxable, long-term capital gains and qualified dividends are often taxed at preferential rates, making this an attractive option for higher-income individuals who want to grow their wealth.
Conclusion
With the numerous savings accounts available, each offers unique tax advantages and investment opportunities. Building a balanced financial plan involves combining emergency savings and tax-advantaged retirement accounts and exploring other saving options such as HSAs, FSAs, and 529 plans. By diversifying your approach and maximizing your contributions, you can ensure long-term financial stability and growth in 2024 and beyond.
WHWM is here to guide you in identifying your priorities, developing a plan, and making adjustments along the way. By choosing WHWM, you're partnering with our Founder and President, Stephen Bodwell. As a CPA and CFP® professional, Stephen is committed to helping you achieve your financial goals and aspirations. Don't hesitate to take the next step toward realizing your dreams. Schedule your complimentary, no-obligation 30-minute consultation with Stephen.
Walnut Hill Wealth Management, LLC (“WHWM”) is a registered investment advisor offering advisory services in the State of Texas and in other jurisdictions where exempt. The information provided is as of the date indicated and is subject to change.
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