Are you trying to figure out how to save more? Are you in debt right now? Are you motivated to get out of debt? You can use your abilities to make more and save more. But how do you accomplish that? In this episode of Best in Wealth, I share some of the accounts you can use to not only save more money—but help it grow. Financial freedom makes the stress roll off your shoulders. If you’re ready to be in that place, listen to this episode for numerous strategies and resources.
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Outline of This Episode
[0:34] The economy: Good news and bad news
[5:02] Invest in depleted asset classes
[7:04] Focus on becoming debt-free first
[9:20] Healthcare savings: two things to think about
[11:50] Take advantage of Roth/Roth IRA contributions
[13:53] The Backdoor Roth
[14:50] The Mega Backdoor Roth
[16:15] Look into employer stock purchase plans
[19:23] Consider an annuity or brokerage account
Become debt-free—then focus on emergencies
We want debt to be gone before you start to save more. Debt makes it difficult to truly save and reach financial freedom. Those who have adequate savings either make an incredible amount of money OR they make modest incomes but still save 30-50% of their income. How? By living below their means.
Once you have your debt paid off, your focus needs to shift towards saving. But what? And how? You need to start with an emergency fund. How long of an emergency fund should you save up?
3 months: if both spouses are working
6 months: if you’re single
18 months: high-income earners or entrepreneurs
Why so much for entrepreneurs? You may want at least 18 months of expenses set aside to take advantage of mobility and business opportunities that come your way.
Health savings options: FSA and HSA
If you have a Flexible Spending Account (FSA), it’s a great place to put away pre-tax money when you know you’re going to be spending money on medical expenses (medical, dental, and vision). If it’s through an employer, you usually have to spend it before the end of the calendar year.
If you have a high deductible health care plan, start using a Health Savings Account (HSA). If your employer doesn’t sponsor one, you can open one with a bank (or online bank). A single person can contribute up to $3,050 a year and a married couple up to $7,100. They help your current year taxes, you save more money, and when you pay medical you don’t pay taxes. Plus, you can carry the balance over to the next year.
Many people don’t know this, but If you stay healthy—you don’t have to use the money on healthcare. You can keep the money in that account and invest it. Then, once you turn 65, the HSA acts like an IRA and you can withdraw that money in retirement (and hopefully get taxed in a lower tax bracket). Listen to the episode to learn more.
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Roth IRAs, IRAs, and non-deductible IRAs
If your employer offers a 401k, you’re allowed to contribute $19,500 in 2020. If you’re 50+ you can contribute up to $26,000. Another option is a separate IRA or Roth IRA. If you make too high of an income, you won’t get a tax break upfront. It will be considered a non-deductible IRA.
What does that mean? Money still grows tax-free, but when you withdraw any money out you’ll have to pay taxes as if it were income. So what are the income limits? As a family, you can make around $200,000 in taxable income and still contribute tax-free. You can contribute $6,000 or $7,000 if you're 50+. When it comes to the IRA contributions, if you’re over the income limit, there are some neat tricks you can use to save more money.
The first one is the Backdoor IRA. If you make a non-deductible contribution because you’re a high-income earner, we can turn around and roll that traditional Roth into a Roth IRA because there is no income restriction there.
The second option is the Mega Backdoor Roth. If you contribute $19,500 to your 401k, you max out and can’t contribute more. But TWO things allow you to make a higher contribution (and very few 401k plans allows this):
Your 401k plan must allow after-tax contributions
Your 401 allows in-service withdrawals on after-tax contributions once a quarter while you’re working
Both of these things allow for the potential of a Mega Backdoor Roth. With this type of Roth, you can put in about $35,000 that you can convert to a Backdoor IRA every single year. Both of these options get complicated, and there are other rules involved, so feel free to reach out to me with questions.
How to save MORE for retirement
If you still have excess income and would like to save more, look into employer benefit plans, such as a stock purchase plan. If you’re a business owner, you could also open a SEP IRA or Solo 401k. You could even start thinking about your kids—do you want to pay for their college? If that’s something you’re open to, you could open up a 529 Plan to begin saving for their education. There’s a lot of misinformation out there that you need to know so you do everything right—schedule a chat with me to talk more about it.
You can also purchase an annuity. There are very few out there that I would recommend, but some are sold with low commissions, no surrender charges, and you can put money away after-tax that grows tax-free. Those gains become income in retirement. Lastly, you could open up a brokerage account—it’s a far better option than a simple savings account. Why? Listen to the whole episode for more details on how YOU can save more!
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The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.