5 Lesser-known Ways to Catch up on Retirement Savings after Divorce
No matter what your age at the time of your divorce, your retirement plan will most likely take a major hit. In addition to the obvious ways of catching up on retirement savings - increasing your contributions to a tax-advantaged retirement plan, cutting back on expenses, and retiring later, there may be some strategies that are not as familiar.
Make sure you are aware of the following options:
1. Use the Catch-up Contribution Option
Both IRAs and 401Ks have a catch-up contribution provision. In 2022, if you’re over 50 years old, you can contribute an extra $1,000 to your IRA for a total contribution of $7,000 or an extra $6,500 to your 401(k) for a total contribution of $27,000. These are traditionally best used by those who did not save enough in their younger years, but are also a great option for divorcees.
2. Backdoor ROTH IRA
A backdoor ROTH IRA contribution is a method that allows those with incomes higher than the permitted limits to still fund and reap the benefits of a ROTH IRA. These transactions have the potential to be complicated with the steps and rules involved, so please get advice from a financial professional before considering.
3. Home Equity Conversion Mortgage (HECM)
People used to run at the very mention of a reverse mortgage. As with many investment instruments, however, demand in the marketplace has driven improvements over the original version. With the wide array of features now offered, HECMs can be structured to coordinate with many retirement strategies.
4. Delay Taking Social Security
The longer you hold off on taking your Social Security payments, the more you’ll receive each month. If you start taking at your Full Retirement Age (FRA), you will receive 100% of your payment, but for each year past your FRA, you will receive up to an 8% increase in the payment amount. The longest you can delay is to age 70. The benefit of higher income payments will need to be balanced with factors such as other available income sources, health status, family history, etc.
5. Health Savings Account (HSA)
If you have a high deductible health insurance plan, then a Health Savings Account (HSA) is definitely worth looking into. It is the most tax advantaged investment available. The money goes in tax-free, grows income tax-free, and comes out income tax-free if it is used to pay qualified medical expenses. You can let it grow and use it in your later years when your medical costs are typically highest.
The aftermath of divorce sometimes feels as stressful as the process itself. Figuring out the next steps you need to take to help secure your financial future can be paralyzing.
No one option is a perfect fit for everyone. Many of these strategies can be quite technical and have adverse consequences if not executed correctly. Having the right financial professionals on your team can help give you clarity and confidence that the decisions you are making today are the best ones for your family, yourself, and your future.
While you still have your financial information accumulated from the divorce, take the next step to put a financial plan in place.