Where to put long-term savings
HSAs, 401(k)s, and IRAs offer important long-term tax benefits.
- Fidelity Viewpoints
- – 05/03/2022
- Saving in tax-advantaged accounts can help you make the most of your money.
- Workplace plans like 401(k)s, Roth 401(k)s if your employer offers them, as well as IRAs and Roth IRAs offer potential tax-deferred or tax-free growth.
- Health savings accounts (HSAs) offer triple tax benefits: A tax deduction for after-tax contributions,1 tax-deferred growth, and tax-free withdrawals for qualified medical expenses. HSAs work only with a high-deductible health plan (HDHP).
You only have so much money—that's why it's important to get the most out of every dollar you are able to save. Using the right accounts can help you do that.
Fidelity has been researching strategies that could help your savings go further. Here are some tax-smart savings tips to help put your money to work for you.
Be sure to get the match in your workplace plan
If you have a workplace savings account like a 401(k), 403(b), or 457 plan and your employer offers a matching retirement contribution, take advantage of it. Make sure you contribute enough to get the full match—it's like free money. You wouldn't give back part of your paycheck, so contributing at least enough to get the full match from your employer should be a priority.
Consider a health savings account
A health savings account (HSA) works with an HSA-eligible health plan, typically a high-deductible health plan (HDHP). If your contributions to your HSA are made through your employer, the money goes into the account on a pre-tax basis, lowering your taxable income. Contributions to an HSA through an employer’s payroll deduction are also excluded from FICA taxes (the taxes that fund Social Security and Medicare) up to a certain threshold of income.2
You can also open an HSA if you've purchased an HSA-eligible health plan on your own. When you put money into your HSA, you get a federal tax deduction for the year in which the contribution was made. Unlike contributing through an employer’s payroll deduction, you won't get a break on FICA taxes.
The upfront tax break isn't the only perk of HSAs. When you take money out of the account to pay, or reimburse yourself, for qualified medical expenses, withdrawals of contributions and earnings are tax-free.
There's no time limit on when you can take money out of your HSA. If you don’t need it for health care expenses now, you can save and invest it for health care in future years, or in retirement, when it's likely to come in handy. You can even wait years to reimburse yourself for your current health care spending. The one rule is that the HSA must have been opened before the expenses were incurred.
For instance, if you opened your HSA last year and pay $3,000 out of pocket this year—you can take money out of your HSA to reimburse yourself next year, in 5 years, or in 20 years. Be sure to save your receipts in order to show that the expenses were qualified and when they happened.
After age 65, you can use the money saved in an HSA for any nonmedical expense. But you'll have to pay income tax on nonmedical withdrawals—just like a withdrawal from a pre-tax 401(k) or traditional IRA.
If you're able to, saving the money in your HSA for retirement could be a good idea—particularly if you're able to invest and grow your contributions. Even if you're only able to save part of your contributions for the future, it can still be worthwhile.
The cost of health care in retirement continues to increase, so it can be a good idea to prepare specifically for those expenses.
Take advantage of retirement accounts
If you have a retirement plan through your employer, it's a good idea to keep increasing the amount you’re able to save as much as you can.
Our rule: Aim to save at least 15% of your pre-tax income3 each year. Any match you get from your employer is included. That's assuming you save for retirement from age 25 to age 67. Together with other steps, that should help ensure you have enough income to maintain your current lifestyle in retirement.
Not everyone is eligible to contribute to an IRA. If you or your spouse is covered by an employer's retirement plan, the deductibility of a contribution to a traditional IRA is phased out at higher incomes. The ability to contribute to a Roth IRA is dependent on income as well—but is not affected by a retirement plan at work.
Read more on Fidelity.com: Which IRA is right for you?.
If you are self-employed or have income from freelancing, you can open a Simplified Employee Pension plan—more commonly known as a SEP IRA—which allows tax-deductible contributions. Even if you have a full-time job as an employee, if you earn money freelancing or running a small business on the side, you could take advantage of the potential tax benefits of a SEP IRA.
Try to increase the amount you’re able to save each year. If you get a raise or a bonus every year, that can be a good time to bump up the amount you’re saving. Even increasing savings by as little as 1% can add up over time.
Read Viewpoints on Fidelity.com: Just 1% more can make a big difference.
If you've maxed out your savings opportunities in an HSA, workplace plan, and in IRAs, you can still save in a taxable brokerage account. In order to help reduce taxes, it can be a good idea to put tax-efficient investments, like stocks held for long-term growth and tax-free municipal bonds, in your taxable account, and hold investments that may be less tax-efficient in your tax-advantaged accounts. This strategy is called asset location.
If you're looking for more tax-deferred savings, consider a tax-deferred annuity. Tax-deferred annuities have no IRS-imposed contribution limits5 and, when funded with after-tax dollars, they don't have a mandatory withdrawal requirement at age 726—although there may be fees and tax penalties for withdrawing earnings (but typically not for withdrawing the original investment) prior to age 59½. A tax-deferred annuity won't give you a tax break for contributing but it does offer tax-deferred growth. You won’t pay income taxes on investment returns until money is withdrawn.7
Read Viewpoints on Fidelity.com: How to invest tax-efficiently.
Where you invest matters
Saving and investing in tax-advantaged accounts can help you make the most of your money. The less money you pay in taxes, the more money you can put to work growing and compounding for your future.
Next steps to consider
See if your savings are on track in the Planning & Guidance Center.
Get your Fidelity Retirement ScoreSM—a credit score for retirement.
Transfer account balances from an old HSA into Fidelity.