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What Accounts Should You Consider If You Want to Save More? Thumbnail

What Accounts Should You Consider If You Want to Save More?



Warren  (00:04):

Hi, everyone. Welcome to our weekly workshop, a financial workshop. My name is Warren Burger. I'm the founder of linary financial advisors. And I'm happy that you could join me today. We try to get together every week at 5:00 PM Eastern time on Sunday to discuss a different financial topic that might be appropriate for your own personal situation, and hopefully can add to your, your own financial wellness. So I'm glad that you can make it. And if you have at the end of this presentation we will I'll answer any questions that I can, that you may have. And and off we go. So before we start well today, our topic is where should I put money if I want to save more? So we're always trying to strive to save a bit more money reduce our expenses where we can.

Warren  (00:56):

That's always the advice that I try to give people makes for a better future. But sometimes it's a question as to where do I want to put this money? What kind of tax advantage buckets might, I want to put this into what kind of financial tools are available for me to save money? So today we're just going to go over a few of those some of the attributes of those of those vehicles and hopefully it's something that you can use in the future. I have to start first with my disclaimer and that's basically just to let you know that this is for educational purposes only. It's not for accounting or investment or legal advice. It's really hoping that you can, you can take some information away from here see if it applies to your own personal situation and then run it by the professionals in your life. You're a financial advisor, your, your attorney or your CPA to see if it's an actual fit for you. So just keep that in mind as we go forward.

Warren  (01:56):

So I'm going to start out today with what I think is really the basic thing that everyone needs to have. And that's the foundational savings. And what I mean by foundational savings is really talking about an emergency fund. I think it's the first place to start when you're thinking about saving and it, it just makes a lot of sense, right? What happens in the event that you lose your job? What happens in the event that you have an unforeseen expense that you haven't been budgeting for? Where's that money gonna come from? And I think all too often, people find themselves in a situation where they haven't put this money aside for emergencies, and they end up in a position where they have to scramble either putting things on credit cards or taking money from investment accounts that they weren't planning on that may or may not have some tax implications there as well.

Warren  (02:44):

So a couple of just rules of thb that I think that you can look at when it comes to an emergency fund if you're married and both your you and your spouse are employed, three months worth of living expenses is generally going to be okay, it's one person loses a job. You still have someone else that's working. And, and like I said, these are just rules of thb. It really it goes to your comfort level. But these are things that we've just seen in the past that that really makes sense for people. If you're a single or you're the sole income earner for your family we talk about really having something closer to six months of money set aside and that's because we don't have that backstop of another salary coming in. And in the event that the one one earner is, is out of work.

Warren  (03:29):

We're, we're really going to be putting a lot of pressure on, on the F the family situation. So, and then for high income earners or entrepreneurs, we actually recommend having 18 18 months worth of really emergency savings. But I like to call it a dry powder. So if you're an entrepreneur or you're, you're a higher earner nber one, you can afford to have a bit more money put aside, but also you might be in a position where certain opportunities are going to come your way, whether they're business opportunities investment opportunities where you you might want to have access to cash that you don't want to be reaching into certain investment accounts for that. W because it might be an inopportune time from a tax perspective, or even from the market perspective, we don't want to be diving into investment accounts when markets are down.

Warren  (04:16):

So just a couple of things to think about when it comes to setting up your emergency fund the next the next series of saving we talk about is healthcare savings. So you know, all of these things are just different vehicles, different ways to think about putting your money into separate areas of your life. They all have a distinct they all have a distinct purpose. And so you need to evaluate, what is that purpose? What are you going to end up using these funds for, and then just adjust it accordingly. So when it comes to health care expenses the first thing we talk about is the, a flexible savings account. So you can make a tax deductible contribution for $2,750 to be used for medical, dental, and vision care. The thing with the FSAs, and, and I've actually been caught on this in the past in my, in my previous career.

Warren  (05:09):

If you don't use the money by the end of the year it, you lose it. Some companies do offer a grace period at the end of the year to use it and then there, and some companies also offer up to $550 of funds that they'll allow to be carried over, but it's really up to your company. And most companies do w we'll we'll, you will lose it if you don't, if you don't use it in that year, the next health savings vehicle is the health savings account. And this is the most when it comes to saving. And we talk about 401k and we tax deferred money, the most tax efficient account that you can save money into. And it's something, if you do have access to it it's really, it really should be something to be considered is the health savings account.

Warren  (05:56):

And so a health savings account you can contribute $3,600 for an individual or $7,200 for a family. And if you're over 55, an additional thousand dollars into it. And so this is what's called triple tax advantaged. So the way a health savings account works is that your, your, your, your the money that you put into the HSA is tax-free when you put it in it rose tax-free. And if you take the money out for health for, for health expenses you are, you are not taxed on that money coming out. So it's that triple tax advantage that makes us a really powerful tool. And what we find is that you know, when, when we look at retirement accounts and HSA can be an important vehicle in retirement, because we do have an increase in healthcare costs, so saving for those healthcare costs, and being able to use that in this tax advantage way really adds up to a lot of savings.

Warren  (06:55):

And you can, these health savings accounts are investible. So you can be investing in the markets capitalizing on compounding over time with the markets to be able to save up a sizeable medical fund for when you do reach retirement. And especially as you get towards the latter stages of retirement, where we start to get into long-term care costs they can really balloon. And so the HSA is something that really takes it's a consideration. There's a couple of caveats to being able to, to having access to an HSA. And that's what you have to have a high deductible plan. That deductible has to be at least $1,400 for individuals and $2,800 for families. And it has to be an HSA eligible plan. You have to have a maxim, maxim out-of-pocket cost of 14,000 for families and $7,000 for individuals. So just keep that in mind, very powerful, very powerful tool, probably the most tax efficient tool that there is out there.

Warren  (07:58):

So now we're talking about retirement savings, and this is the crux of where a lot of people, this is what people think about when they're talking about savings for the most part. And a lot of us do have retirement plans that are offered through our employer. And it's just a couple of ways to look at it. W w we definitely want to be saving into a tax deferred vehicle if we can certainly enough if you have an employee employer match for your retirement savings I've seen matches up to 7% that's essentially free money. That, that is your employer matching the savings that you put into your either 401k or 4 0 3 B whatever applies to you. And essentially that is an employer giving you free money. It's an, it's a, it's an added benefit that, that you deserve as part of your compensation.

Warren  (08:52):

And if you're not taking advantage of that, and a lot of in a lot of situations, that that would be a mistake. So you want to at least start out by, by contributing up to that match. You can contribute up to $19,500 annually. If you're 50 and over, you can contribute up to $26,000 into a, into a, a a contribution plan. Now, if you've made the maxim salary deferral contribution, you've, you've hit your 19,500 or your 26,000 there is a way to do some additional contributions called a mega backdoor Roth contribution. I will be talking about that in a future workshop but just know that there is another vehicle out there to, to have additional savings. It's a bit more complex into how that works. And so it's, it's sort of deserves its own time. I think if we're going to get into that if you think that your income is going to be rising in the future you definitely want to consider contributing to a Roth 401k, and essentially the, the Roth vehicle is if you believe that you're going to have a higher tax base income tax base in the future, then saving into a Roth vehicle, which is a tax-free vehicle when it comes out might be really appropriate for you for a Roth IRA, you can contribute up to $6,000 a year or $7,000 if you're 50 or over.

Warren  (10:16):

But there is eligibility phase outs for that depending on how much you earn it's between 125,000 and $140,000 of your modified, adjusted gross income, if you're single and it's between 198,200 $8,000 of your Maggi if you're married, filing, jointly, and essentially what that means is once you hit the bottom of that that phase out the amount that you're able to, to save into that account is reduced accordingly up until the point that you meet re reach the max, at which point you can't, you can't contribute to that retirement vehicle. So just keep that, I don't mind now, if you have imagi, that's greater than $140,000 or, or $208,000, if you're married, filing jointly, and you've maxed out your 401k salary if you want to save some more, you can consider doing a backdoor Roth and you could save an extra $6,000 into a Roth IRA account, $7,000, if it's over 50.

Warren  (11:23):

And it essentially what that is, is your, your, the backdoor Roth is you're setting up a traditional IRA which normally if you're, if you're below a certain account thresholds, you would be able to have a tax deduction for your traditional IRA, but in this case, because you can't have a deduction for the traditional IRA, you have what's called a non-deductible IRA, which means you're putting after tax money into that IRA. You would take the traditional IRA that you've contributed to, and you would roll that over into a Roth IRA and then pay any of the capital gains taxes that are due on any of the earnings that you've made in between setting up the traditional IRA and doing that roll over. There are definitely a few other factors to consider when doing this. Don't just go out and do it really talk to your your financial professional that's in your life, your CPA, or your financial advisor to know just a couple of the nuances that are involved in doing it. This is more to just really let you know that these vehicles are out there and that you can take advantage of them. But like I said, make sure you're running it by your, your professional.

Warren  (12:38):

Let's talk a little bit about college savings depending on where you're at in your life. You may have already been saving for college. You may be just starting, but you might want to consider a 5 29 plan. I think a lot of people have probably heard of this. One of the things that I think is interesting about the 5 29 is that you can use your annual exclusion to contribute up to $15,000 per year. And you can do that gift tax-free. So it's just something, a lot of times, grandparents will use this to contribute to their grandchildren's college fund. It's a great way for them to be able to do it and not having it affect their, their gift tax. And rather than doing just the $15,000 per year, you can also do a one-time lp s of $75,000.

Warren  (13:26):

And then you can, you can essentially make you can elect to treat that as though it was given a $15,000 a year over a five-year period. So it's just something to keep in mind. And like I said, a lot of times we see that with grandparents that want to help contribute to a grandchild's education also with the five to nine, you might be eligible for state income tax deduction or credits. If you're contributing to a plan that's sponsored by your state and that's gonna be different from state to state.

Warren  (14:01):

So tax deferred insurance, that's our next topic a little bit trickier. I, I it's, it's generally a little bit lower on my list of places that I like to see people, but save money. But you know, a lot of these, if you've sort of maxed out some of these avenues that we've talked about and you still have money that you're looking to put away, w you know, we're looking for any place that we can actually achieve some sort of tax mitigation. And so you can consider an annuity. Some people are dead set against them. They annuities can have their place. The one thing that you have to understand with an annuity is that depending on where you're getting it from, there could be some, some substantial internal costs involved in the annuity, which actually takes away from any of the benefits that you may gain.

Warren  (14:45):

So you really have to evaluate each annuity for, for what it's providing, as well as the provider themselves to, to see if, if, if it's up to, up to snuff in terms of being able to give you that maximize that tax advantage while not getting subsed by by the the internal costs. And now some of these tax deferred annuities, you know, because when you're in an annuity, it will grow tax deferred. And that, and that's, that's an attractive thing, especially as you're looking for avenues for tax deferral, and you can find contracts that will offer less of a guarantee on the annuity side of things. And, and that becomes a lower cost option and really becomes more of a vehicle for, for exploring the the tax deferral mechanism within the annuity. But like I said, each one of these has to be considered in its own, right?

Warren  (15:38):

Especially the internal costs involved in the annuity and should be run by your financial professional as well. You can also, if you're thinking that you might need to increase life insurance, you could look at some of the benefits of buying a cash value life insurance policy. We can get both the life insurance pledge that you need, and then have some tax deferral gains that are there as well. Once again, same thing, internal costs that are involved and whether it's whether it's appropriate for your personal situation, really make sure you're running this by your, your, your financial professional, but these are other options for tax deferral place and places to stay, save money.

Warren  (16:19):

So some of the other accounts to think about oh, excuse me. And that's really, once you've exhausted once you've exhausted your ability to save and to sort of tax defer to tax-free accounts that your, your last sort of bastion for saving is, is really a taxable account. And that's really what we refer to as your general brokerage account where you're buying stocks or mutual funds or electronically traded funds. And the longterm gains on the sale are taxed at preferential rates. You do want to be careful about selling short term short term capital gains that can be accrued in these taxable accounts, anything less than a year. Those are taxed at ordinary income. And so that can be a substantial tax burden when you factor in short-term capital gains, but long-term capital gains are taxed at preferential rates, as well as qualified dividends are taxed at preferential rates as well.

Warren  (17:18):

So an a taxable account is actually a quite a tax can be quite tax efficient, especially when you invest in certain types of funds or zero dividend stock funds, municipal bond funds, or ETFs that can help further mitigate that tax liability within that taxable account. And so often what we do as we get closer to retirement, we really start to look at the different tax accounts and sort of the income streams that we're going to derive in retirement and what it, what is the most strategic that we can take money out of those accounts. And ultimately you look at either a tax deferred account a, a tax-free account, like a Roth or a taxable account, like these investible accounts that we're talking about, and depending on where you are in your retirement there are strategic and tax mitigation thresholds that can be used to strategically take money from these accounts.

Warren  (18:13):

Those also should be talked with your, with your financial advisor and your CPA to see what makes the most sense for your personal situation. Another thing if you're charitably inclined is that you can consider using a donor advised funds where essentially you're able to you're able to contribute to a charity by essentially setting up a fund. And and, and that fund distributes to the charities over time. It can set you up for a situation where you can you could double up on your deductions for a given year so that you're over and above the the, the single deduction, and then allow those donor advised funds to go out where they need to go. So it's just another, another thing to think about obviously if you need assistance in creating retirement plan or social media, 30 plan, or talk about retirement distribution or tax mitigation efforts we'd love to help you.

Warren  (19:12):

I've had if you go to linary financial advisors.com/get in touch you can schedule a complimentary call. We talk about financial problems or questions people might have and see if we're a fit to work together. And if we're not a fit, we'll always make sure that we're referring you on to somebody that can help, or at least set you off in a direction where you can go and help yourself. So that's, that's really we try to work from, from that frame and hopefully that any interaction that people have with us, they come away feeling as though they've been helped. So that's basically it in terms of the the, the different savings vehicles. There are more that are out there, but I think that that's a good place to start for people to start doing their own investigation.

Warren  (19:56):

And let's take a look and see, it looks like we have a couple of questions here, so let's see what we can do. So can I pay insurance premis from an FSA or an HSA, great question. You cannot pay your insurance premis from from an HS I'm an FSA or HSA. You can, there's, there's two exceptions to that actually from an HSA, you are able to pay premis for, if you're on Cobra, if you've been separated from your job and you're on Cobra or you're on unemployment those are really the two times that you'd be able to pay premis. Otherwise you are able to pay co-payments or you know, any, any actual medical benefit medical payments that need to be made, can be made from those premis. No, except for those two those two caveats another question what is magic?

Warren  (20:56):

Okay. Big conversation, but in, in, in brief Maggie is your modified, adjusted, gross income. And essentially it's an important figure because the government uses that to ascertain whether or not you're eligible for certain either tax benefits or certain benefits or retirement accounts for instance, your IRA accounts, whether they're tax deductible, or whether you're able to actually contribute to a Roth IRA. We talked about some of those limitations earlier. And then also when it comes to Medicare your Medicare premis are going to be based on your modified, adjusted, gross income. And essentially what that is, is that your adjusted gross income. So the deductions that you've made from your income you, you end up coming up with your adjusted gross income. And then for, for the Maggi, they add back in a certain tax exempt interest and certain deductions that get added back into the Maggi.

Warren  (21:53):

And you're not going to find that on your tax return, you actually have to do a couple of calculations and, and to get there. It's a really important nber to know, especially as you near retirement and you're, and especially as it applies to income as it relates to Medicare. So another great question. So that's all we have for questions right now. I hope that you found this helpful. I have included a a link to my personal calendar in the comment section. So if you would like to schedule a complimentary retirement call I'd love to hear from you and hopefully we get to see you next week. We'll be doing this again on Sunday at 5:00 PM Eastern and have a great weekend.