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Not all retirement accounts are equal. Some are like Aquaman and some are like Superman. I mean, sure, breathing under water is great and all, but not nearly as great as flying.
To fly in your retirement years, you have to know which types of accounts will be your most powerful superheroes. My answer is clear. For most folks, your Superman and Wonder Woman are the Roth IRA and the Health Savings Account (HSA).
Both offer tax-free growth (something no other retirement account or strategy offers except for properly structured whole life insurance and municipal bonds) and both offer some liquidity provisions so you can access your money before you reach 59 ½.
With the Superman Roth, you can always withdraw your contributions (but not investment gains) at any time without penalty. Conversions and rollovers are not the same as contributions — contributions are the amount you put in each year out of earned income (max of $5,500 if 49 or under, $6,500 if 50 or older). So if you contributed $5,500 a year for 10 years, you would have $55,000 you could access penalty free in the event of a job loss or other unexpected event.
There is a second type of Roth offered by many 401(k) plans called a Designated Roth Account that allows you to put more in — but the 401(k) version of the Roth does not have the same penalty-free access provisions as the Roth IRA. Still, I fund a portion of my 401(k) to my Designated Roth because I know how powerful Roth IRAs are once you are retired.
Once retired, there is a formula that determines how much of your Social Security is taxable and how much in Medicare Part B premiums you'll pay. If you have a higher income, a larger portion of your Social Security is taxed (up to a maximum of 85% of benefits may be taxable). If your income is high enough, you will pay hundreds more each month for your Medicare Part B premiums. The great thing about the Roth is withdrawals from a Roth don't count in the formula that determines these things. Withdrawals from other retirement accounts like IRAs and regular 401(k)s or 403(b)s do count.
With liquidity provisions and extra tax benefits later on, the Roth is truly a superhero.
The HSA is just as powerful, but in a different way. You have to have a high-deductible HSA-qualified health plan to fund an HSA. With the HSA you get a tax deduction for what you contribute (for a single plan max of $3,350 if 49 or under, $4,350 if 55 or older), and you can withdraw the money tax free at any time for eligible medical expenses (like co-pays, prescriptions and dental work).
The HSA becomes even more powerful if you fund it each year and let it grow for your retirement years. This means you would pay for health expenses out of pocket, not out of your HSA. Then in retirement, you would have another pot of money that could be used tax free for health-care expenses. HSA withdrawals don't count in the formulas for Social Security taxation or Medicare Part B either. With her nurturing nature, an HSA is certainly the Wonder Woman of retirement accounts.
Do everything you can to fund these superheroes each year. They will help make sure you are flying in your retirement years.