Welcome back to the fourth article in a series dedicated to illustrating ways to prioritize saving for specific future milestones and the uncertainties of life. This post explores Roth IRAs, contributing the maximum allowable amount to your 401(k), Roth 401(k), 403(b)or 457(b) account, taxable investment accounts, and more. The end of this post expands on the different ways you can automate saving towards your 2024 savings priorities.
Learning Points
Successfully building your wealth can feel energizing, and with that success can come new stresses and complexities.
To help you think some potential next steps, let’s walk through a savings priority strategy. This approach prioritizes sequencing contributions to specific financial needs and their related investment accounts.
This strategy utilizes both tax-advantaged and taxable accounts.
While this strategy can be effective and transformative to your personal finances, like all things personal to your finance, you’ll want to understand what it is and how it can be customized for your specific situation.
Overview
Ideally, when you use this strategy, you fully fund each priority before turning your attention to the next priority. So, start with the first priority and when it’s fully funded, move on to Priority 2, then Priority 3, and so on.
While this strategy specifically refers to how to attack debt and invest for retirement, it can incorporate saving for major purchases such as a vacation home, a child’s wedding, or other financial goals. It should be incorporated into your comprehensive financial plan. Depending on your goals and personal situation, the order of these priorities can change.
Let’s dive into the next steps in the savings priority strategy and help you organize what comes next.
Roth IRAs. Create Future Tax Flexibility. Contribute the Maximum Allowable.
In 2024, you can contribute up to $7,000 per person, or up to $8,000 per person if you are age 50 or older.
IRA contribution limits are per taxpayer, not per account. So, if you have both a Roth IRA and a traditional IRA, you must split your contributions across both accounts up to the limit. Additionally, contributions can only be made with earned income.
You can contribute to both a Roth IRA and a 401(k) plan if you are qualified and fit within the contribution and income limits.
Additionally, there are adjusted gross income phase-out ranges for taxpayers making contributions to a Roth IRA. For single and head of household taxpayers, the income phase out is between $146,000 and $161,000. For married couples filing jointly, the income phase-out range is between $230,000 and $240,000.
There is a five-year holding period for qualified distributions. This period begins January 1 of the year a contribution is made to any Roth IRA.
Withdrawal rules for Roths IRAs are more flexible than those for traditional IRA or 401(k) plans. Your Roth IRA account should never be taxed if you wait until after age 59½ to take gains. If you experience an unexpected expense that fully depletes your emergency fund, you can distribute some or all your principal contributions from your Roth IRA at any age for any reason without taxes or penalties.
There are no required minimum distributions for a Roth IRA while the original account holder is alive. However, if you intend to leave your Roth IRA assets to heirs after your death, they should plan on required minimum distributions. The beneficiary of your Roth IRA can be anyone you designate.
People over 59½ who’ve held their accounts for at least five years can withdraw earnings with no tax or penalty. This is in addition to the contributions they can withdraw with no taxes or penalties.
When it comes time to access your Roth IRA funds, the order of withdrawals for is as follows:
- Contributions (1st)
- Conversions (2nd)
- Earnings (3rd)
Keep in mind that if you’re under the age 59½ and take a Roth IRA distribution within five years of the conversion, you’ll pay a 10% penalty unless you qualify for an exception.
The 2023 Roth IRA contribution deadline is April 15, 2024. You have until that date to make contributions for the 2023 tax year. If you are considering this as a savings priority, here are some specifics to keep in mind:
- The maximum 2023 Roth IRA contribution is $6,500 for folks younger than 50, and $7,500 for those of you age 50 and up.
- For single and head of household taxpayers, the adjusted gross income phase out is between $134,000 and $153,000.
- For married couples filing jointly, the adjusted gross income phase-out range is between $218,000 and $228,000.
The sooner you are able to invest, the longer your investments have time to compound. If you want an even deeper dive into Roth IRA accounts, check out this piece.
Your Emergency Fund…Build it Even Stronger.
If you like the idea of living your life knowing that you have six-, twelve-, or eighteen-months’ worth of cash reserves, consider adding to your emergency fund. This can be especially beneficial if your income is tied heavily to variable compensation, a volatile industry, or if you are self-employed.
If you are married or have more income stability through your partner’s wages, consider skipping to the next step.
Maximize Your 401(k), 403(b), Roth 401(k), or 457(b) Account Contributions.
Maximizing your contributions to a 401(k), 403(b), Roth 401(k), or 457(b) account can help you save for retirement and reduce your taxable income.
In 2024, you are allowed to contribute up to $23,000 per person and $30,500 for investors 50 or older. By maximizing your contributions to these accounts, you can increase your retirement savings and benefit from the tax savings.
Again, the sooner you are able to invest, the longer your investments have time to compound.
Pay off lower-interest debt.
It may be beneficial to pay off lower-interest debts, such as a car loan or personal loan with a low interest rate, before tackling other debts. Keep in mind that owning a car can be a financial liability, as it is a depreciating asset. If something were to happen to the car, such as it being totaled, you may end up owing more on the loan than the car is worth. To protect your financial well-being, it is best to avoid taking out loans on depreciating assets.
Once you have taken care of your other financial priorities, you can focus on paying off your mortgage early.
Owning a home is a major expense, but it is not always necessary to make mortgage payments for 30 years. After you have addressed all of the other steps, consider shifting can work towards paying off your mortgage early and owning your home outright. The balance between paying off your mortgage and investing in a taxable account is as much a personal decision as it is mathematical and will depend on your financial goals and what is best for you and your family.
Before you build a spreadsheet analyzing your situation, the smart folks at Honest Math have published a thoughtful “mortgage math” analysis exploring this topic. It’s certainly worth a read.
If you decide that paying off your mortgage with an extra monthly payment makes sense, make sure you automate that extra payment.
Taxable Investment Account for mid-term needs/projects or long-term retirement planning
Your emergency savings can protect you in the short term. Your 401(k) and Roth IRA investments can help secure your retirement goals. Where do taxable investment accounts fit into your personal finances.
By opening a taxable investment account, you can set aside money for mid-term needs and wants such as an anniversary trip, a wedding, a home addition, a vacation home, a rental property, or a new business venture. Align these investments with the time horizon of your specific goals. A taxable account can also provide you with additional tax flexibility when you use it to save for retirement. Being aware of your tax diversity is a useful lens in your financial planning.
Keeping track of your priorities is critical.
Here are some additional insights on how to automate your savings priority strategy.
Ways to Automate Savings
Life is busy enough. An effective way to consistently set aside money and decrease your mental load is when you automate savings. To do this, set up automatic transfers from your checking account to your emergency fund, 529, taxable investment accounts, etc. so you can easily and conveniently save toward your goal over time without having to remember to manually transfer the funds yourself.
Here are some approaches to automate saving:
- Choose an amount to transfer that is comfortable for you to save each month. You may want to start small and gradually increase the amount over time as you become more comfortable with the process.
- Set the frequency of the transfers to fit your budget and cash flow. For example, you might choose to transfer money every week, every two weeks, or once a month.
- Use the app to track your progress and see how your emergency fund is growing over time. This can help you stay motivated and on track.
- Consider setting up alerts or notifications in at your financial institution to remind you when a transfer is scheduled or to notify you if your account balance falls below a certain level.
- Be sure to choose a high-yield savings account or money market account that is FDIC- or NCUA-insured to store your emergency fund. This will help you keep your money safe and easy to access when you need it.
Before you go down the path of automating your savings at your current financial institution, it is worth exploring whether a traditional bank or a credit union is best aligned with your needs. If you’re interested in learning more about this topic, consider these practical approaches to automate savings.
Summary
Over the past four posts, we’ve explored some top savings priorities designed to build a strong foundation for your personal finances. We’ve covered the following savings priorities:
- Starting your emergency fund
- Optimizing your 401(k) contributions for a company match
- Tackling credit card debt
- Health savings accounts (HSAs)
- Insurance coverage
- Estate planning essentials
- Education Funding (529s)
- Roth IRAs
- Contributing more to your emergency fund
- Maximizing your retirement plan contributions
- Paying off lower-interest debt
- Taxable investment accounts
We also covered different ways to automate saving toward your savings priorities. An effective way to consistently set aside money and decrease your mental load is when you automate savings.
Ideally, when you use this savings priority strategy, you fully fund each priority before turning your attention to the next priority.
This wraps up our four-part series – hopefully you found these topics helpful and interesting!
The Next Step
When you know who and what are truly important, you can create incredible clarity about your spending and saving.
Clarity to confidently spend on things that matter. Clarity to avoid spending your hard-earned resources on things that aren’t aligned with what you want in life.
As your financial planner in Saint Louis, we can help you plan for the future and enjoy the present moment.
Start feeling more confident that you are making progress toward your savings priorities.
When you thoughtfully execute on this approach, you can increase the likelihood of achieving your goals, setting new ones, and enjoying the present moment.
Frequently, proactive and open collaboration with your tax and estate planning professionals can help you work towards your financial planning goals. Working with your financial planner in Saint Louis can provide you with the right mix of accountability, collaboration, and long-term thinking.
If you’re unsure about your next step, let’s talk.
Disclosure
This commentary is provided for educational and informational purposes only and should not be construed as investment, tax, or legal advice. The information contained herein has been obtained from sources deemed reliable but is not guaranteed and may become outdated or otherwise superseded without notice. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decision.