Saving for retirement is something I aim to do every year. And this year is no exception. But I'm not putting all of my money into a single account. Rather, I'm splitting it up among these three specific accounts for three specific reasons.
1. A solo 401(k)
Because I'm self-employed, I'm able to contribute money to a solo 401(k). Unlike an employer-sponsored 401(k) plan, I have to manage this account myself. And I'm not entitled to any sort of company match, which is a big bummer.
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However, the money I put into my solo 401(k) gets contributed tax-free, which means I'm shielding some of my 2024 earnings from taxes. Plus, solo 401(k)s offer much higher contribution limits than traditional or Roth 401(k)s.
Now your ability to max out a solo 401(k) will hinge on your income. But all told, I'm aiming to contribute as much as possible.
2. A taxable brokerage account
A taxable brokerage account is not a retirement account the same way an IRA or 401(k) plan is. There are no IRS benefits to be reaped by investing in one of these accounts, and if you sell investments at a profit, you're liable for capital gains taxes the year you take your profit.
That said, my brokerage account contains a mix of investments that are earmarked for retirement, so in my mind, this counts as a retirement plan. And the reason I'm putting money into a taxable brokerage account is that I want flexibility.
With my solo 401(k), withdrawals taken before age 59 1/2 will cost me a 10% penalty. Now I'm not certain that early retirement is something I want. And it may not even be something I can afford.
But if my financial situation allows for it, I'd like to at least have the option. As such, I need to keep some of my long-term savings in an account that isn't restricted.
3. An HSA
Because I'm enrolled in a high-deductible health insurance plan, I'm eligible to fund an HSA this year. Now this is an account that I don't have to reserve for retirement if I don't want to. You can take an HSA withdrawal at any age to pay for qualified medical expenses.
However, I fully expect my healthcare bills to soar in retirement, because that's just what tends to happen. So the money I'm putting into my HSA this year is money I'm hoping to reserve for retirement. And knowing I have those funds earmarked helps me stress less about the cost of healthcare down the line.
Also, I'm a big fan of HSAs because they offer three tax benefits. Contributions go in tax-free, investment gains are tax-free, and withdrawals used for qualified medical expense are tax-free as well.
You may be saving for retirement in a single account this year, and that's fine if it works for you. But dividing my money across different accounts makes sense for me, which is why I'll be aiming to contribute to all three in the course of 2024.
