**I am not a financial expert! These are things I have researched and done on my own. Please do your own thorough research to decide if these ideas could benefit you prior to making any financial decisions!**
By now most of those working full-time with FIRE in their belly have surpassed the basics and are looking for other ideas to save pre-tax and post-tax money! If you are reading this and you are still heavy with debt and don’t have your emergency fund built (3-6months of expenses at least!), stop here and redirect to DaveRamsey.com!!
Are you still with me? Congratulations! You have paid off your debt (unless you have intentional, low-interest debt for something like a rental property of course!), you are maxing out your 401k and you are looking for other ways to save money to become financially independent and retire early (FIRE)!
Here are some things you may have access to that you can take advantage of now to better prepare for your future! This list is not exhaustive by any means, and I welcome any comments with additional ideas!
Health Savings Account (HSA)
A Health Savings Account (HSA) is offered by many companies now in conjunction with a high-deductible, lower premium health insurance plan offering. The way this works is that your company will contribute a set amount to the account and you can also contribute PRE-TAX money! Total employer+employee 2017 contribution limits are $3400 for an individual and $6750 for a family. There is also an additional $1000 catch-up contribution allowance for those who are 55+. This money grows in an account and most plans have an option to actively invest a portion once you hit a certain balance. Now, this may not be for everyone! You will have a higher deductible ($1300-$2600+), but you can pay for the medical care or prescriptions with your HSA account (via direct pay to the provider from the website or with the debit card they provide you) until you hit your deductible. For 2017 the plans limited maximum out of pocket for a single person to $6550 and for a family $13,100 a year. The beauty of this is that this account stays with you forever! If you don’t use it, you don’t loose it! It just keeps building in value! So if you and your family are in pretty good health and don’t have many doctor visits or prescriptions, it is a great way to stash away more PRE-TAX money and reduce your taxable income!
Flexible Spending Account (FSA)
Switching gears, the Flexible Spending Account, or FSA, is the “use it or lose it” account. During your annual enrollment, you will have to open an FSA and commit a certain amount of funds to it for the year. At the end of the year, if you didn’t have enough eligible expenses, you lose the remaining balance. So you MUST be very organized when planning to use these accounts! The way these usually work is that you spend the money and then file paperwork for reimbursement from your FSA account. There are several types of accounts:
Health FSA– Max annual contribution in 2017 was $2600 and it is for healthcare-related expenses. So if you know that you are going to have a large procedure that will leave you with a substantial co-pay that you will be responsible for, this may be a good option! One example is if you are on an 80/20 plan where the company pays 80% and you pay 20% and you are planning on having a baby….More than likely, your 20% will exceed $2600, thus you can get reimbursed the $2600 from your FSA account! There is also a $.17/mile reimbursable allowance for travel to obtain medical care, so keep that in mind too! Now, if you don’t have any big, planned medical expenses, this may not be a risk you are willing to take!
Dependent Care FSA– Max annual contribution in 2017 was $5000 and is for dependent care costs only. I used this when my son was young and I was paying out the nose for daycare! This would be something to look into if you have a child under age 13 that you have daycare, before/after school care, preschool, summer camp, babysitting or nanny expenses. This can also be used if you have a spouse or relative who lives with you who is mentally or physically unable to take care of themselves. This was a great way for me to reduce my income by $5000 for money I was going to spend for sure!
Individual Retirement Account (IRA)
Individual Retirement Accounts or IRAs, can be a great way to save on taxes and build wealth for retirement, however there are contribution and income limits! There are two types of IRAs, Traditional and Roth. Here are some details to better understand each!
Traditional IRA- If you are single and make over $133,000, congratulations, you are rocking it, but you won’t be able to get the tax benefits from a Traditional IRA. Single people making over $118,000 can contribute some, but not as much as people making under that amount. So the biggest benefit is for those making under $118,000 because they can contribute $5500/year to a Traditional IRA, and it is fully tax deductible, reducing your income while investing in your future! If you are over 50, you can contribute $6500/year to catch up! These are easy to open and fund!
Roth IRA– This IRA is a little different from the Traditional IRA, in that you contribute POST-TAX dollars to this account and can NOT deduct the contributions from your taxes. The same contribution and income limits apply to a Roth IRA as do to a Traditional IRA. So why would you contribute to a Roth IRA if it doesn’t reduce your income? For one, if you are early in your career and still at a low tax rate, now is a good time to contribute to a Roth IRA because when you withdraw later in life you will be taxed at that income tax rate, which may be higher! Also, because you are putting POST-TAX money in, the money grows TAX-FREE in the account! When you retire, the contributions AND the earnings can be withdrawn TAX-FREE! This helps you diversify your portfolio and have a tax-free stream of income in retirement! Another benefit is that if you have a financial emergency occur, your contributions can be taken out at any time, penalty free! (The earnings can’t be accessed tax-free until after age 59 1/2) You can also use the ENTIRE amount (contributions+earnings) to pay for college tuition, books and expenses at accredited schools! If you are buying your first home, you can pull up to $10,000 out of your Roth IRA to help pay for it without paying taxes (another $10,000 if your spouse has a Roth IRA too!). Or if you have a child that needs help with their downpayment on THEIR first house, you can give them $10,000 from your Roth IRA penalty free! ***NOTE- your Roth IRA must be open for 5 years to take advantage of some of these programs! There are additional benefits you can check out, including those for military personnel!
Back Door Roth IRA– What if I make too much money to contribute to a Roth IRA? Sounds like a nice vessel to still put money in to have for retirement flexibility! Good news! There is something called a Back Door Roth IRA. How this works, is that you open a Traditional IRA account and contribute $5500/year POST-TAX (you don’t qualify for pre-tax) and then within just a few days, you call the company and ask them to convert that money to a Roth IRA. It is important to convert it as soon as possible, because if the balance earns too much interest in the Traditional IRA, you will have to pay taxes on the earnings when you convert it! If you already have a Traditional IRA with a pre-tax money balance sitting in it, this may not be a good option for you! If you convert that Traditional IRA money to a Roth IRA, you will be responsible for paying the income taxes on that money! Remember, you took the tax write-off on that Traditional IRA money to make it essentially PRE-TAX money!
College Savings Plan
As one of the financial guru’s I have the utmost respect for, Bob Brinker, states, are you taking care of the “Young Sprouts”? Do you have a college savings plan established for your child? I know some people within the FIRE circle don’t utilize these plans because they want more flexibility with their money, but I have a 529 savings plan for my son and am glad I do! I established it many years ago and have been slowly dollar-cost-averaging money into the plan every month where it is invested in an age-based mutual fund with a .12 expense ratio. This money can be used in all 50 states at accredited colleges, including 4-year schools, community colleges, trade schools and study abroad programs. The best part is that it grows tax-free with no contribution or income limits! If your child doesn’t go to college, you can let it sit and grow and change the beneficiary to your grandchild! Or you can take a non-qualified withdrawal, but you will have to pay income taxes on the earned money (not the contributions) and a 10% penalty. If your child gets a scholarship, you can take the amount of the scholarship out as a non-qualified withdrawal and not pay the 10% penalty! (You do still have to pay income taxes on the earnings!) How does it affect financial aid? If the 529 is parent or student-owned, it doesn’t count against you on the FAFSA, but if a grandparent pays for a student from a 529, it will count as income for the student and may affect student aid the following year! Do your homework, but this may be a good option for some!
What if you have put money everywhere else you can to take advantage of PRE-TAX benefits and you still have money you want to use wisely? A brokerage account would be a thing to think about! I opened a brokerage account with Vanguard and invest in their Total Stock Market Index Fund (VTSMX) with extra money that I have saved! There are other companies that offer similar funds, just make sure that they have as low an expense ratio! This is the key! You can pay someone to actively invest and manage your money, but that small percent (1-2% fee) you pay now, adds up to hundreds of thousands of dollars 30-40 years from now! Remember, these brokerage accounts are funded with POST-TAX money, so the earnings are fully taxable when you sell your shares!
As I said before, this list is by no means exhaustive, but I hope this has helped give you ideas of other places you can find tax-advantages as well as vessels to help build your wealth so that you are able to become financially independent and retire early! Best wishes!!!