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Which Account Do I Use First?
Episode 494th January 2022 • Financial Planning for Entrepreneurs and Tech Professionals • Mike Morton, CFP®, ChFC®
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When it comes to saving money for the future, there are variety of accounts from IRAs, 401(k), 403(b), HSAs and more! How do you know which is best for you? 🤔

Megan and I chat about her recent article which goes through exactly which accounts to fund for 2022.

A brief summary:

  1. Pay off credit card debt
  2. Flow qualified education expenses through a 529
  3. Contribute up to the match in your 401(k) or 403(b)
  4. Budget 10% for unknowns (emergency fund)
  5. HSA
  6. Roth IRA (or backdoor Roth IRA)
  7. Maximize your 401(k) or 403(b)
  8. Save into your 457 plan
  9. Contribute to a SEP IRA
  10. Maximize any other employer retirement plan
  11. Save into a 529 for future education expenses
  12. Roth Conversions
  13. Savings into a Brokerage account
  14. Pay down low-interest debt (student loans and mortgages)

Check out the entire blog post at Marotta On Money to read the details.

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Transcripts

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[00:00:15] Megan: Thanks for having me. 


[:

Because today we are going to be talking all about. Account funding priorities for 2022. So we're here at the start of the new year. And so you're thinking about, I know you're already thinking about not re not resolutions. You're thinking about where am I going to save my money this year? we're going to run down the list 


[:

[00:01:00] Mike: That's correct. That's correct. We love this stuff. And we've got a plan for the future. So we're planning for 2022 and what this means, account funding priority. What does that mean? It means when you have an extra dollar. All right. Where should you be looking at to spend or save or do things first is the, order to be thinking about order of operations. 


We're calling back to your, elementary math school days, the order of operations that we want to do in order to maximize the benefit for you now. And in the future, 


[:

[00:01:41] Mike: Excellent. Excellent. So we're going to dive right in, because I want to get through this and we have, I don't know, 10, 12, 13 different topics to quickly cover, which could be a challenge for the two of us, because we love all these different areas. We could probably spend half an hour in? 


each one. So we're going to go as fast, as fast as we can to hit the nuggets, the highlights on why you want to be going in this order. 


ccount funding priorities for:

Just the highlights on the podcast. All right, here we go. Megan, you're ready. 


[:

[00:02:26] Mike: All right. Number one, we want to pay off any credit card debt. Now I'm guessing as a pretty no-brainer, but why do we start with paying off credit card debt? 


[:

If you have credit cards. Solve it step one. 


[:

simple on Yes. 


Again, we could spend forever on this, but listen, that's it. If you have credit card, if you're not paying off the credit card every month, just start there, come up with a plan for that first 


[:

[00:03:20] Mike: that's right. That's right. 


[:

[00:03:23] Mike: there first, 


[:

That's later in the waterfall, but if you have credit 


that problem. 


[:

Right. Would fall in this category. So we just really high interest. rate debt. So we just, we bundled it on their credit card. Cause that's where it's going to be 99% of the time. But if you had something else, that's really high interest rate. 


It's right at the top of the list. All right. This number two. I love this because this is not this, the waterfall here. The account funding is not there's some tips and tricks. And That's why I love this. In fact, number two, here is a great one, which is puts your current qualified education expenses, flow those through a five to nine plan. 


[:

Private school tuition is now like K through 12. Private school is now qualified education expense. Some states, not all states, but some states have homeschooling expenses count as private school. So just there's tons of possible expenses. If you have any of those. By simply contributing them to a 5 29 plan that your state sponsors and then immediately paying the expense out of the 5 29 plans. 


There's no savings here. We're just flowing it through the account. You can get a state tax deduction. So it's not every state that offers a state tax deduction. So you do have to do a little bit of research I'm in Virginia. I know Virginia does. There's other states that will offer a state tax deduction, regardless of what state 5 29 plan you have open. 


You can research it more, but if you have any qualified education expenses, just flow them through the account. And it's like getting an immediate discount on that expense. 


[:

I love that one. It's so great. And I know for Virginia's pretty, pretty good stat state tax savings here in Massachusetts. We have some as well. It's not quite as great. But you definitely are saving hundreds of dollars. I want to say potentially on flowing it through. The 5 29 plan. So what a tremendous tip and just like you said, look it up. 


If you get, this is for a state tax deduction is how we're getting that discount we're receiving money on those expenses. All right. Number three, once we've done that, this is defer to the Roth 401k or 4 0 3 B for the full employer match. So not, you're not saying here to max it out right now, but just to get that full employer match. 


[:

So the match is you only get a match if you contribute to your retirement plan. And then what happens is your employer says, ah, you've contributed to the retirement plan. So I'm going to give you some free. Okay, so contribute enough to get the free money. We said Roth here, because most people go ahead. 


[:

[00:06:50] Megan: we say Roth by default because most people benefit from Roth contributions. And that's because most people think in their head like, oh, I'll lower my tax this year. And then that will somehow pay. Later in retirement, but when you take it out, the growth on all of that money is going to create really large RMDs, which very well might come out at the same, if not a higher tax rate. 


And then it's going to mess up your non-taxable social security, and it's going to give you Medicare surcharges. And there's so many things that you've not thought about in that equation. And when I do the math, most people benefit from RA. There are a handful of complex cases that we financial planners can figure out. 


Oh my goodness, you're one of the special butterflies who needs traditional and that's what you need for your plan. But quite frankly, it's very small number of. And those people normally benefit from systematic Roth conversions later in life to solve the problem that we're creating with traditional deferrals. 


So sticking in the rough that's normally the right choice, but if your employer only has traditional put in traditional, get the free money is the important 


[:

[00:07:57] Megan: Yes. 


[:

So I'm looking forward to diving into that, but this one get the free money, 3%, 5%, whatever they're matching, throw it in there. All right. Next one. Up on the list is budget at least 10% for unknowns. 


[:

fund. It's but we call it an emergency budget because instead of just having some people have a target cash account and they're like, oh, I want to have this much cash in my emergency fund. But the problem with that is that. That's not how expenses typically come in. 


First of all, like you might have one year in which like the roof leaks, the car needs repairs, and the pet is in the animal hospital and your cash account is insufficient, but typically 10% saving 10% every month, every year, saving 10% of what you make for those unknowns is going to pay off when all of that happens. 


You will have the money to be able to solve the problem without having to pull into your retirement savings. So before we start the real retirement savings, this step four is make sure that everything beyond this point is truly retirement savings. Basically. 


[:

So get this emergency or this bucket kinda set up first. 


[:

There's a lot of places you can save your emergency fund and have it be valuable. It doesn't have to be sitting in a cash account depending upon what your employer plan rules are for early withdrawals from a Roth. You may even be able to have it be your match money. That's, sitting in that 401k plan, but you have to read the documents. 


You have to understand the rules for how you get the money back out. So you want it somewhere. 


You can get it. 


[:

remember it's here, it's in this account, it's this amount or whatever it is. So to your point, have it available, know where it is And make sure that's earmarked before we're, doing the next 


[:

[00:10:43] Mike: that's right. That's right. All right. Next up here on the list is the health savings account. My favorite account type. So Y let's see, we got the match, so we got the match that 3% cause we're taking the Free money. 


but the next place you're saying to actually save is in the health savings account. 


[:

You have health expenses, even if you're completely healthy with the number of things that qualify. You will be able to get it back out whenever you need it, but you can let it sit there and grow grow. And you know what? You only have more health expenses when you get older. 


I feel very confident in that people will be able to get the money back out of their HSA when the time comes. 


[:

I love 


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[00:11:46] Mike: money in the HSA More free money. Okay. Look the, and we don't have to say it here, but in the very, very case that, geez, I really don't have qualified expenses. It's just like another 401k account, or IRA account, which is coming up here a little further down the list. 


That's exactly how it works in retirement. 


[:

[00:12:18] Mike: Perfect. Perfect. Okay. Next up on the list. I know, cause we're only about halfway through our list so far is now we're on to contributing to the Roth IRA or use a backdoor Roth IRA. So I just want to point out. So we had the Obviously paying down any high interest rate debt and the handling emergency fund situation, then we've got the free money with the employer, retirement accounts, but then we're in the HSA. 


Or the 5 29. and now we're in the HSA. We did that and now we're into our individual accounts, so we haven't even got bad. I just want to point out we haven't. 


got back to the employer retirement plan yet. Okay. So just mentally, keep track of that, that you might, because people will find themselves in oh, I'm maxing out my employer and I'm not doing an IRA. 


And in, in your account funding here, the IRA comes first. 


[:

And you're going to be able to do with it, what you need to do with it. And so if you've locked it up in your 401k, there's the chance that your employer rules might make it so that you can't get your money back out. But again, if you have that financial shock, we need to be able to get the money so that you can just keep going and not get into credit card debt. 


[:

And So put the money in your own, account first where you have more control over asset allocation and fund selection. Then within the employer retirement 


[:

[00:14:11] Mike: I love the special butterflies. That's great. All right, so now the next one immediately following that is the finished funding, your Roth 401k, or 4 0 3 B 


[:

You should consider making one, a solo 401k's are really great and tend to be the right solution for a lot of people. As far as opening a self-employed retirement account. And yeah, just stash away, some more money into that 401k plan. 


[:

And I was just having a conversation with a client on that front. Hey, I'm doing had some self-employed money, taking some consulting work. Great. You don't need that, all that cash right now, let's open up, and yet another account where we can shove money. 


And I love that. I use that phrase all the time. Let's shove more money into these tax free tax deferred accounts. You are going to save and make so much more by doing. 


[:

And you could also consider funding yourself and immediately converting it. It'd be equivalent to doing it as 


a 


Roth, 


[:

IRA. Just be careful there that if you do have a balance in a traditional. Right already. And then you're like, oh, I'm employed. I'm going to get the SEP IRA. Oh, now we're into some tax consequences. 


So just be aware of that. If you have traditional IRA money, it gets bundled with your SEP IRA money. When you do any kind of conversion over to a 


[:

[00:16:11] Mike: Yes. 


[:

[00:16:12] Mike: Yeah, if you, Yeah. 


that's correct. If you contributed money, if you have money in your traditional IRA that you rolled out of a traditional 401k where you have not taken out taxes on that money, which is majority of people then you just gotta be careful. You can't just roll over your SEP IRA. We said, we can roll this up prior to the Roth IRA, which is true, but you might have tax consequences depending on your situation and money that you have. 


All your IRAs. Okay. Not to get caught up into the details. But before we get to the step right there, we also have number eight, defer to the Roth 4 57 plan. Now we're throwing around, not a lot of numbers. What is the Roth? 4 57 


[:

The 4 57 is its own category. Confusingly the same contribution number, but it's a different limit. So it means that you can just save more retirement money than other people can. If you have access to a 4 57, we've included it in the list, even though it's uncommon because a lot of people who have it don't know that they have it. 


And so if, again, if you're working for the government or you're working for a nonprofit ask HR, do we have a 4 57? If you do put money in it, because it's a really great another option for saving. 


[:

Well, trust me, if you have a 4 57, just reach out to a financial planner because. I can describe to you ways that you might be able to take advantage of this and save even more tens of thousands of dollars, Right. 


by, oh, you have money in a brokerage account. You can use that for your living expenses. 


Anyway, don't want to get into the details again, but here's the takeaway. If you look through your employer benefits and you have a 4 57, if you just do a search for that four or five seven, take advantage of it, or at least make a conscious choice. Yeah. All Right. 


now we're onto the contribute to the SEP IRA. 


So is this the same as we were just 


[:

And not employee, even though it's confusing. Cause you wear both hats. And because of that, it has its own limit. So you can save a little bit more than somebody else who has two jobs in us. Two 401ks. 


[:

[00:19:12] Megan: Yeah. Consider other 


[:

[00:19:16] Megan: And this is cause there's a lot of different kinds of plans. And so some people might have a thrift savings plan available to them. Some people have deferred compensation options that are available to them. And so this is an opportunity to consider those. So before we move on to the next. 


Consider, if there's more places that you can shovel retirement money into. And if you have one and you're like, I don't know what I should do with this. And they didn't mention it in this article or in this podcast, you should email me, fill out the contact us form and say, what about this plan? When should I do that? 


And I'll add it to the list for next year. 


[:

package, right. 


. 


[:

We want you to be able to access the money today if you need it. But we also want the account type to be tax advantage to the best possible way that it can be. And so just looking at those two will help you weigh whatever other employer options you have. 


[:

you're getting that, 


potentially getting that 15% discount on buying the stock through the ESP. So throw that up in number two or three on the list to consider, depending on your situation for the. 


[:

[00:21:01] Mike: All right now we're on to save for future expenses in the five to nine. So now the 5 29 for future expenses is showing up here. 


[:

But if you have future expenses, this is when you can save on your state tax by making those contributions. 


[:

[00:21:36] Megan: I've heard it said 


that 5 29 plans are a little bit like a poor man's trust though. Cause it is a way that you can save for future generations and have it be outside of your state. Cause it's a completed gift when you give to it. 


So if you are in a family where you really do want to have this legacy with your children or your grandchildren, a 5 29 plan can be a really affordable way to create lasting wealth for the next generation. 


[:

way. 


[:

This is your opportunity to use your brokerage. To make your traditional account into a Roth account and you net went out most of the time in that transaction because you lose the annual taxation of dividends and interest. And then you also lose the balloon payment that you're going to owe on your RMDs for your traditional account. 


And so if you have both the brokerage account and the traditional account, consider making your traditional account a Roth, yes, you will owe more tax today, but over your lifetime of taxation, it will probably pay. 


[:

In a future episode, these three different accounts. And you're exactly right. I understand that you're going to save massively on taxes over time. And so I'm going to earmark that for a future episode, we're going to dive into some of these numbers and put It into practice. 


[:

[00:24:12] Mike: Yup. 


[:

Compared to the best plan is so much better than not converting. So converting something is almost always the right option. Keeping it traditional. Your whole lifetime is normally a bad move. 


[:

there's other options. So I always say to everybody, keep all the tools in the toolbox. 


You want some traditional, some Roth, some taxable, it gives you more opportunities for planning in the future. But what is, you're saying highlighting here, you'd heavily lean towards the Roth. Get that tax-free forever. 


[:

It's worth so much. 


[:

your brokerage 


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[00:25:42] Mike: That's Right. And then last year, and I love that you had this last is paying down debt. So you would save in the taxable brokerage account and save and invest that money for the future, rather than pay down that, that low mortgage, 3% or that long-term debt at really low interest rates. 


[:

But we have the sane at Marotta that most Americans have a mortgage and the rich have to. And that's because there's a lot of value and advantage that can be gained from having more of the money in your. And then having the mortgage company saddled with not having the money in their pocket. There's just so much tax planning opportunity that's gained from that situation. 


And the interest rates are today so low that there's really not a reason. If anything, you, maybe you should refinance if you haven't done it in several years. 


[:

Now this is not the right idea, but they just feel so great. And you can't underestimate that side of it too. So not just saying, oh, you always got to go this way. You got to know your. 


[:

[00:27:39] Mike: Yeah, Oh, I love that. This is great, Megan and the articles. Unbelievable. I remember this one from last year. I know it's been updated for 20, 22 this year and this is just a tremendous resource for readers and listeners to use. So where do the listeners find this information and find you 


[:

We'd like to see that we don't have any secret sauce at Marotta wealth management. We just publish everything that we do for free online. And if you'd like to try it to do it all for yourself, we have the. To teach you how to do it all. And if you read it all and you think this is really great, but I don't have any free time to do it. 


That's why we're also a financial planning firm. So we're happy to be hired and partner with you and help you accomplish all of these goals. 


[:

So stay tuned for that. And yeah. And thanks again, Megan. We'll see you soon. 


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[00:29:10] Mike: Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at financialplanningpod@gmail.com. Until next time thanks for tuning in