Saving for retirement is more than just throwing cash in a retirement account. There’s also a lot of strategy involved in maximizing your gains while minimizing your tax liability. It can feel complicated, especially in the beginning when you’re not sure what you’re doing.
It’s natural to look back and wish you could have a do-over when it comes to starting your retirement savings journey. If such a thing were possible, here are the three things I’d do to get my nest egg off to the best possible start.
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1. Make regular monthly contributions beginning as young as possible
I opened my first retirement account when I was 20, but regular contributions didn’t come until a few years later when I was a little more established in my career. I know I still got off to an earlier start than many, but I still wish I’d been able to make consistent contributions even sooner.
Your early contributions wind up being your most valuable in retirement. A recent Goldman Sachs survey found that savings made in the first 10 years of a person’s career accounted for nearly half their total savings by retirement.
I know this isn’t always easy to pull off, especially for new graduates who may be struggling with student debt and also saving for other important life goals. But as soon as you’re able to, try to establish a regular savings habit. It’s fine if you can’t afford to set aside more than a few dollars at first. Start there and build your monthly contributions up over time.
2. Save in Roth accounts when my income was lower
Roth accounts are extremely valuable to low- to middle-income savers who expect to be in the same or a higher tax bracket in retirement than they’re in today. Unlike traditional retirement accounts, Roth accounts don’t give you an upfront tax break on your contributions. But after this, your money grows tax-free. If you hold it until you’re at least 59 1/2 and have had the account for at least five years, the IRS won’t count your withdrawals as income in retirement.
This can save you a fortune in taxes, but it’s not the right move for everyone. Those in their peak earning years may find that tax-deferred accounts, like traditional IRAs and 401(k)s, work better for them. This gives them the tax break in the year of their contribution. It also enables them to defer taxes on their savings until retirement when they’re hopefully in a lower tax bracket.
Some high earners may not be able to contribute to a Roth IRA directly due to income limits. But if this doesn’t apply to you, it’s definitely an option worth considering. Employers are also increasingly offering Roth 401(k)s to their employees, and these don’t have the same income limitations as Roth IRAs.
3. Use my health savings account (HSA) for retirement savings
I’m not currently eligible to contribute to a health savings account (HSA), though I had one for many years. During that time, I put a little money in the account to cover medical expenses as was the original intention of the account. But looking back, I wish I’d used it more like retirement savings.
HSAs offer many similar benefits to traditional IRAs, including tax-deferred growth on savings. You also get the added bonus of tax-free medical withdrawals at any age. However, non-medical withdrawals under 65 carry a 20% penalty in addition to taxes.
If I could do it over again, I would’ve probably saved more money in my HSA that I could’ve set aside for retirement medical expenses. And I would’ve invested this money so it could grow more quickly.
Unfortunately, there’s no way to undo what I’ve already done. I can only go forward. I continue to save regularly for retirement and to reevaluate the accounts I’m using each year to ensure they’re the best options for me.
If you’re just getting started with retirement savings, review the above list. Whenever possible, prioritize these tasks if you think they make sense for you.
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Kailey Hagen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.
