If you read any financial blog, you will quickly find most advice is to max out your retirement accounts that are available to you. These typically include an employer sponsored 401k and either a Traditional or Roth IRA. In special situations, you may have the opportunity to contribute to an HSA (Health Savings Account) and you’ll find all kinds of advice on why an HSA is the best retirement account for financial independence seekers.
Should You Max Out Your Retirement Accounts?
Before you begin stashing away cash, you should ask if maxing out your retirement accounts is for you. At a minimum, you should get the employer match on your 401k. After all, your contribution is tax deductible and the employer match is free money (and tax-free at that!) as well. Because this question is addressed countless times, I won’t get into the details again. You can read about it here.
Max Retirement Account Contribution Limits
As of 2017, the maximum contribution limits for the retirement accounts are the following.
- 401k Employee Contribution Limit: $18,000 ($1,500/month)
- Traditional/Roth IRA Contribution Limit: $5,500 ($459/month)
- HSA Contribution Limit: $3,400 (individual) ($284/month)
For most of us an HSA is unavailable, so the total contribution to all accounts is $23,500. That’s a minimum contribution of $1,959/month. If you have the opportunity to contribute to an HSA that total increases to a whopping $26,900! Increasing your minimum contribution to $2,242/month.
How to Max Out Your Retirement Accounts
I personally prefer applying the “snowball” method to max out your retirement accounts. First, get your employer match on your 401k. Once you have that match, max out your IRA. Typically, I would say investing in your personal IRA first provides more options and lower fees than your employer 401k. Determine what a reasonable monthly contribution amount is and set that for an automatic transfer. In order to max only your IRA you need to contribute $500/month. If you can double that you can roll over those payments to continue investing in your 401k.
If you have an HSA, the only change would be to max the HSA first, then your IRA, then 401k. This is because the HSA is accessible before the normal retirement age for qualified medical expenses. I’d recommend
I’ll use my employer match as an example, and assume that I also have an HSA – which I don’t :(. My employer matches 5% on the first 10%. So basically they match 1% for every 2% I put in, with a maximum match of 5%. To get the full match, I need to put in 10% of my salary. Just subtract that amount from the $2,242 and you get your contribution amount for your HSA and then the IRA.
Other Ways to Fund Your Retirement Accounts
For a lot of us, contributing enough to max out your retirement accounts will be extremely difficult. But hey! If it were easy, we’d all be rich! So here are a few techniques to help you along the way.
- Contribute any bonus or raise to your accounts. After all, this was unexpected money and won’t be missed.
- Create a side hustle – notice I said create
- Find a roommate!
Do you have any strategy for contributing to your retirement accounts? Let us know in the comments below!