Five Legal But Unconventional Ways to Use Your Tax-Deferred Accounts – Forbes | Vette Leader

If you know anything about 401(k)s, IRAs, and HSAs, you probably know that the first two are for retirement savings and the last are for healthcare expenses. However, these accounts are actually more versatile than it might appear. Here are some unconventional ways to use some of these tax-deferred accounts:

Roth IRA as an emergency fund

One of the first recommendations often made by financial planners is to build an emergency fund of at least 3-6 months of necessary expenses. However, many people are reluctant to put that much into a regular savings account for their retirement savings. There’s also a tendency for people to plunder regular savings for things that don’t quite measure up to the level of a true emergency.

One way to combat both problems is to use a Roth IRA to build your emergency fund. (You can use this backdoor method if you’re making too much to pay directly into a Roth IRA.) That’s because, unlike other retirement accounts, Roth IRA contributions can be withdrawn at any time and for any reason without taxes or penalties . Only the income is potentially taxable and subject to a 10% early withdrawal fee, the sum of the contributions comes first.

The advantage is that any income you don’t withdraw can eventually become tax free after you’ve held the account for at least 5 years and reached the age of 59 1/2. This allows you to save for emergencies and for retirement at the same time. The fact that you have to fill out a withdrawal form to withdraw money from your Roth IRA, and that you’re sacrificing the opportunity for tax-free growth, can also make you less likely to use the account frivolously.

Remember, you want to make sure any money that’s part of your emergency fund is in a safe and accessible place like a savings account or money market fund, even if it’s in the Roth IRA. After all, you don’t want to put it into stocks only to see the value fall when you need the money most. once you are Now that you’re able to accumulate enough emergency savings elsewhere, you can then invest the Roth IRA in something more aggressive for retirement.

401(k) for a first-time home purchase

Do you have a pension from a previous job? By putting it into an IRA, you can use up to $10,000 of it toward a first-time home purchase without the normal 10% early withdrawal penalty. It doesn’t even have to be a “first time home purchase” literally. You must not have owned your own home for the last 3 years.

Yes, you’re plundering your retirement account, but owning a home that will eventually pay off can be extremely beneficial for your retirement. Just make sure you’re ready to buy a home. Otherwise, depleting your retirement account may be the least of your worries.

401(k) for educational spending

The same goes for converting a retirement plan from a previous job into an IRA and then using it for qualifying educational expenses without penalty. Before using retirement savings for education expenses, make sure you’re heading into retirement without those assets. Finally, there is no financial support for retirement.

Roth IRA for health insurance in retirement

If you plan to retire before you are eligible for Medicare at age 65 and are unable to obtain health insurance through your employer or spouse, you should consider purchasing health insurance through insurance exchanges. Depending on your taxable income, you may also be eligible for grants that can significantly reduce health insurance costs through the exchange. This is where the Roth IRA comes in to help you control your taxable income.

Because Roth IRA withdrawals can be tax-free, you can use your Roth IRA to meet your retirement expenses until you turn 65 without affecting your eligibility for the subsidies. According to this calculator, a 60-year-old couple would pay about $8,500 per year on a mid-level “silver plan” if they had $100,000 in taxable income. With a taxable income of $30,000, her premiums would be about $267 per year. Those savings of over $8,000 per year will likely overwhelm any other factors affecting their decision between Roth and pre-tax contributions.

HSA for retirement

You may know that HSA distributions are tax-exempt for qualifying health care expenses, but they are also unpunished for any purpose after the age of 65. This means that an HSA can serve as a tax-advantaged retirement savings account. Remember, in retirement, they’re still tax-free on health care expenses, which a Fidelity study estimates at about $315,000 over the expected remaining lifespan of a 65-year-old couple.

Because of this, you might not want to step back from your HSA today, even if you have qualifying medical expenses, but instead want to keep the money growing tax-free. Of course, this assumes you have sufficient income or savings to cover your medical expenses now. You can also invest your HSA dollars to grow for retirement.

There are many ways to take advantage of different tax-deferred accounts. They are not limited to their main purposes. The key is to understand your options and do what makes the most sense for you.

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