I’m always excited to speak to a prospective client for the first time. It’s a chance to get to know each other and make sure that it’s the right fit on both sides. It’s also a chance for me to take a look at what they have going on with their retirement planning.
Unfortunately, there are several things I see people doing over and over again. And, really, these are fixable things that could make a big impact on your future. Here’s what I see:
You have money in savings, but you’re not maxing out your 401(k)
One of my personal rules of financial planning is that you should never miss an opportunity to put money into a more tax-advantaged position. This means that after you have a sufficient cash reserve, make sure that you are maxing out all of your tax-preferred investing for the future:
- Roth IRAs
- Backdoor Roth IRAs
The list isn’t really that long since the IRS only gives you a few options. All of these options are what I would call use it or lose it: if you don’t max out your 401(k) this year, you can’t turn around next year and put in the extra to make up for the contributions you didn’t make.
You’re not banking money in an HSA account
For my clients in an HSA-compatible health plan, I recommend that they put in the maximum amount allowed every year and then not use the funds to meet their deductibles. Instead, plan on using money out of their savings account
I think of HSA dollars as the most tax-advantaged dollars available. They are the only dollars that go in before tax, grow tax deferred and come out tax-free for medical expenses. Most plans allow funds over $1,000 to be invested much like your 401(k) in long-term investments. What this gives my clients is a tax-free pot of money to pay their retirement health expenses with. The bonus is that it helps with present taxes as well.
As with all tax advice, please consult your tax advisor.
You’re not taking advantage of the backdoor Roth IRA
There was a lot of speculation that when SECURE 2.0 was passed that the backdoor Roth IRA would be eliminated. GOOD NEWS- it wasn’t.
For singles whose income exceeds $153,000 and married folks whose income exceeds $228,000, this is a way to get money into a Roth IRA. Essentially, you put money into a traditional IRA and then immediately convert it to a Roth IRA – paying the taxes on the earnings. With the immediate conversion, the earnings are pretty close to zero and the additional tax due is pretty close to zero if not zero.
The one thing to look out for with this strategy is if you have additional traditional IRAs. If you do, there are formulas that need to be followed on what portion is taxable and what is not. If you do have additional traditional IRAs, be sure to check in with your tax advisor regarding this strategy and the impact it could have on your taxes. You don’t want a big surprise tax bill!
My goal is to make my clients’ money work harder for them. I want to make sure they know every option available to them that will allow them to maximize today’s money so it’s working toward their goals. I don’t want anyone to look back and wish they’d taken advantage of strategies that we could have implemented together. So, if you see yourself in any of these scenarios, it’s time to talk to a professional about making some changes. I’m always here to answer your questions!