You probably have a few financial goals: pay off debt, fund your HSA, buy a new home, and . . . save for retirement. You know saving for retirement is important, but how important is it, relative to your other goals? How much should you put in while you’re working towards other goals? An excellent article in U.S. News and World Report recently addressed this topic. Here are a few things to consider.

  • What is the interest rate of your debt? Paying off debt is usually Priority #1, but consider the interest rate you’re paying. For example, if you’re dealing with credit card debt with a 20% interest rate, you need to focus on knocking that out, but if you got a great deal on a car loan at .05% interest, you can afford to invest in your retirement account because you’ll probably be earning much more than that long-term on that money.
  • What about your Health Savings Account (HSA)? It’s a good idea to fund your HSA before your IRA for a couple of reasons. First, contributions go into HSAs tax-free, grow tax-free, and are withdrawn tax-free (as long as they’re withdrawn for qualifying medical expenses). Also, people tend to have significant health expenses in retirement, so HSAs are a good vehicle for a portion of your retirement savings.
  • How quickly should you ramp up your downpayment for a house? There’s no “right” or “wrong” to this question — it partly depends on how important home ownership is to you and what the market looks like in your area (for example, it’s often cheaper to pay a mortgage payment, even with the downpayment, than it is to rent in some parts of the country). However, keep in mind that in some cases you can use funds from an IRA as a downpayment on a house without paying the penalty for early withdrawals. Retirement savers can withdraw up to $10,000 ($20,000 for couples) penalty-free from an IRA for a first home purchase. Keep in mind that there are rules that must be followed and income tax will be due on the distribution.
  • What if you have a 401(k)? If you’re pretty sure you’ll be sticking around long enough to be vested, it’s a good idea to first fund your company-matched 401(k) to take advantage of the money your employer will be contributing. If you don’t plan to stay long, you’d be better off investing in your IRA.
  • What if you want to start a business? If you’re launching your own business, consider opening a SEP or SIMPLE IRA. These are great for business owners and solo entrepreneurs who need to invest more than the maximum for an IRA. A solo 401(k) is another option, but there are additional requirements and paperwork involved. Be sure to check out all the retirement saving options for entrepreneurs before you decide to go with a traditional or Roth IRA.

Knowing what’s best for you means evaluating your own individual situation and having a good idea of where you’re headed in the future. If you’d like to talk through your options, feel free to give us a call at (864) 836-3136 and we’ll schedule a time to talk.