Early in our careers we often think of ways to save enough to meet our goals. We're always striving to get to a certain level of earnings so we can save more, or even just for pride. Some folks who surpass that earnings goal, however, end up savings less and failing to build wealth as efficiently as possible.
Most 401k accounts allow you to save a percentage of your income. Let's say, for example, that you're saving 15% of your income - a number many experts say is a good retirement savings goal. There's a maximum contribution you can make to a 401k. Currently, that's $22,500 each year. If you make more than $150k, you're likely hitting your max before the end of the year. So, are you taking advantage of all the tools in your belt to continue to save?
I meet a lot of folks who proudly state they have been maximizing their retirement contributions for years. I agree that's something to be proud of, but if they haven't found new ways to save, they may just be saving a significantly smaller portion of their income than they always thought. When we're sitting on cash without a purpose, we tend to spend it. So if you're saving less, and your spending is increasing, you may be setting yourself up for failure.
Here is a limited list of other potential ways to save when your 401k is maxed out.
- HSA: A health savings account is a great tax deferral tool. It's often referred to as a "triple tax-exempt" account because you can deduct your contributions, defer capital gains, and qualified distributions can be taken out tax-free. With proper planning and record-keeping, these distributions can be more flexible than many might think.
- If you have the option between a high deductible plan and other health insurance, it's often worth the high deductible plan just for the HSA benefit.
- Roth IRA: I know what you're thinking: "Wait, don't I make too much money to contribute to a Roth IRA?" Well, the answer is yes and no. You can't make direct contributions, but there are opportunities to do what's commonly referred to as "back door" Roth contributions. There may be some limitations to the value provided based on other tax-deferred accounts.
- ESPP: if your employer has a stock purchase program, you may be able to buy the stock at a discount. It's important to have a good understanding of how the taxes work and a strategy to diversify these assets. Concentration risk is a real problem for some folks, especially if the concentration is in stock of a company you work for.
- Cash Balance/NQ Deferred Comp: These aren't available everywhere, but may be a good way to lower current tax liability.
- Non-Qualified Brokerage Account: There is no tax savings, there is no deferral, but there is the potential for market growth. Investing properly and using techniques like tax-loss harvesting can also limit the amount of taxes paid over time.
- Annuities: Though rarely the first solution to consider due to fees, liquidity, and opportunity costs, annuities do provide tax deferral. For folks who are skittish about market risk, some products also provide some protection against loss.
- When it comes to annuities, I always say if it sounds too good to be true, it probably is. Make sure you know all the details about surrender charges, expenses, and alternative ways of achieving similar results.
- If you're a business owner, this list is much longer! Depending on your business structure and the number/type of employees, you can potentially create dozens of different accounts and benefit plans.
There are plenty of other solutions as well. Sometimes it's as simple as having a savings account some of your paycheck goes into until you decide where to invest. Just make sure not to get complacent. There are always going to be new ways to improve your ability to save.
Once again, I'll let my bias out and say this is just another reason to engage the services of a financial planner. As always, if you have questions about anything here, or anything related to your financial situation, contact us and we can set up a time to talk.
There's always a disclosure on this site and on a lot of documents we share about us not giving tax or legal advice. There are a lot of points on this page that refer to tax-deferred accounts, back-door Roth contributions, tax-loss harvesting, etc. I just want to make it a point to say in a normal-sized font right here in the blog post that if you're implementing these types of strategies, make sure you're consulting a tax accountant in addition to your financial advisor.