Now that we are entering December, it has been four full months at least since I have begun my maximization for tax-efficient investment vehicles. I have now been able to experience what it feels like to see my earned-cash be invested in the stock market on a bi-monthly basis, knowing where my end goal is. This article dawned on me when I updated my portfolio’s cost basis, share ownership and forward dividend income as I push through the last month. So what does it feel like and what have I learned from maximizing these investment accounts? Let’s find out!
Maximizing the 401 (k) – To Start
So, most of you know, now from reading my tax-efficient articles and the first one began with maximizing on a pre-tax basis your 401(k). I began this around 4 or so months ago and I had to “catch-up” fast if I were to max out the $18,000 and not feel the burn in a tremendous way, as I was only investing 5% of my salary at the time. Therefore, on a bi-monthly basis, I was investing almost $1,500 per pay, twice per month. This all occurred even before I was able to touch it and invested into the market index as a whole with Vanguard’s VINIX. Talk about an adjustment and I felt like I was going to be eating crackers and drinking water, calling it a nutritious meal. However, that was not the case at all.
This was not the case for a few reasons. (1) I was already investing heavily into the stock market on an almost monthly basis, so the additional cash going in on a pre-tax wasn’t that much of an impact. (2) Further, because it was pre-tax going in – the tax effect actually ended up being far below the $1,500 and was more into the $1,100-$1,300 from a tax perspective. So this was padded there. (3) Lastly, due to the power of automation, it took any timing the market out of the equation and kept me consistently investing into the market – occasionally during the dips from the macro-events. Due to the massive share purchases I was making twice a month, my September dividend from VINIX was huge at $192.36!
Let’s just say, December’s dividend should be much bigger than the last quarter, as well. What’s interesting is that there haven’t been too many stocks on sale that I am dying to get my hands on or purchase. Additionally, I just haven’t felt too much of the shake and/or burden. One thing I am very happy about is reducing my taxable income for this year, by quite a bit. To end the conclusion over the maximizing my 401(k), it hasn’t been that bad, at all and it has been nice going to sleep at night knowing that the rollercoaster ride, especially post-election, hasn’t been experienced as much as I thought I would experience. This gets the green light for next year to continue to do, no doubt.
Maximizing the Health Savings Account (HSA)
For the next topic, I’d like to dive into what it feels like to maximize the HSA. As I described in part 2’s strategy adjustment, this has to be the greatest tax-efficient investment vehicle around. Due to my contributions being from a payroll deduction, I not only save on Federal and State taxes, but I also am able to contribute pre-FICA taxes as well, saving me an additional 7.65%! Further and luckily, my employer on an annual basis if you have an account will contribute $500 towards your account. Since I wasn’t contributing anything in 2016, I had to ramp up how much I was contributing pre-tax and this ended up being approximately $259 on a bi-monthly basis so close to $520 monthly. Well, I am still on my two feet after maximizing the 401(k) AND the HSA. It must be because the $259 really feels like $168 on a tax-equivalent basis… or maybe because we need to just push ourselves through different thresholds and see what happens. So how did this one feel and what have I learned?
(1) Maximizing the HSA ended up being an easy one to do/very flexible with how I could alter and change my contributions. (2) The HSA alone feels like the RIGHT thing to do, due to what health issues/events can come ahead (having a baby, unplanned illness, injuries, etc.) and you aren’t taxed on the withdrawal from the account for tax purposes. Why not maximize it out pre-tax everything? (3) Due to this being a smaller dollar amount than the 401(k) contributions, this one didn’t shake my body as much. I typically would move money from checking to savings/investment accounts on an almost weekly basis, so this was taken out of the equation due to automation. (4) From what I just said – automation made this extremely easy to the point where “it just happens” and you end up being “OK” with what money you have to use/spend during the month.
Downsides, though, to the HSA this year for what my provider uses (Benefit Wallet). I have learned, quite a bit, however, about my HSA. First, which is actually a positive/negative, I need to maintain $1,000 cash balance before I can invest anything over that amount. Not the worst thing in the world, but just something for those that should know most accounts do not let you invest all of it, from the research I have done. Secondly, there were not one but TWO monthly fees associated with my HSA account, which I will use rounded numbers. It was $3 per month for the HSA account itself with Benefit Wallet and then for their investment “arm”, it costs approximately $3 per month as well to have that. Therefore, that is $72 per year approximately that gets reduced. Obviously the $500 per year contribution from my employer covers that without a doubt, but this is a downside, nonetheless. However, for 2017, which is actually amazing news, the $3 monthly fee with Benefit Wallet gets waived if you stay with your employer, so for 2017, my cost per year will be $36 for the investment account. Lastly, the options are fairly limited on the mutual fund side (around 15 or so), with the one I am invested in being Vanguard Total Stock Market Index Fund (VTSMX). Not the worst thing in the world, again, but always love more choices than not. One would say I’m lucky that I have options that are Vanguard, due to their low expense ratio.
To conclude on the HSA, I am very happy with what it’s doing and am excited about the benefits that this account can bring. Maximizing the HSA, overall, has been a great experience and this, as well, gets the green light for 2017! Also – limits were increased to $3,400 from $3,350 and the government is eagerly trying to increase this : )
overall maximizing conclusion
I love maximizing my accounts, without a doubt. One thing you’ll notice, I didn’t talk about part 3 of maximizing what I can with my Traditional IRA. I have excluded that because I am not there yet. Therefore, that could be an article or topic down the road. This experience has been very eye opening on a few different levels. I am more than eager to do my taxes than I ever have been before. I want to see how low my taxable income will be and what the end result is for any amounts to be due or owed. Hell, anything is better than sending them over a 4-digit check! I have been more than happy with the set it and forget it mentality with these accounts, seeing the investments grow and the quarterly dividends have been and are looking to be, very nice. This also has helped me during the times of not seeing amazing deals in the market place and to not time anything. However, don’t get me wrong, I am still researching stocks to deploy the capital that I still have been able to build up from additional savings, side hustles and the like.
What do you think of the maximizing efforts above? Do you currently follow the similar pattern and feel differently? Would you considering doing what actions are taken above? Please share your thoughts, feelings and other suggestions below! As always, appreciate it – happy investing and good luck in the last month of the year!
-Lanny
Congrats on maximizing 401K. If you’re retiring making less than what you’re right now, the actual saving in taxes even better. Not to mention able to practice living for less. What I usually suggested my co-worker to do is to everytime they get a raise, they’d put that raise toward their 401K, so they don’t feel the pain with the initial chop on their take home, but you’re able to do this swiftly, that’s great!
You’re totally right about the compounding effect and company matching, man, considering what I put in is just a fraction of what the account has grown into, and I’m only on the workforce for 12 years. It’s sweet everytime I look at my retirement account. LOL 🙂
Viv –
Thank you very much. Yes, I don’t plan on bringing in this type of income when I’m retired and if I do – it’s because it’s taxed way different ; ). I like the adding your raise to the contribution – I wish all did that or at least into investments that produce something for them. Most of my friends/relatives get raises, but just spend more instead, ah… they will learn I hope, as long as they are healthy, happy and not stressed…
12 years is fairly incredible, wow. I’ve only been working for the firm for just a few months over 5 and it feels like I’ve been doing this for 30 years… can’t imagine what more than 2x that amount of time would feel and/or look like from an investment account perspective. Heck.. I may never get there ; ) We shall see, need to stay aggressive! Thanks for sharing.
-Lanny
Lanny – Congrats on the Max effort! Celebrate that accomplishment. I’ll fall about $1,000 short of my 401k max this year (but not next year). You’re 110% right on the HSA. I started with a company back in 2005 that had a HSHP but I had no clue what an HSA was. Luckily that company kicked in some money each pay check. Then around 2009-10 I figured it out and started maxing my contributions. Shortly after that, investments were allowed in that account. I won’t even consider switching to an employer that doesn’t have a HDHP now – that’s how strong my feelings are in favor of HSAs. At this point my HSA balance sits at $24,364! The best part is that it’s money I’ve never missed.
Polly –
Still… only $1K short is still doing a ton! Nice job. As with the HSA – HOLY SH**! Are you serious, over $24k?! WOW. That’s amazing, congratulations. Such a great success story here, I love it. Huge news and huge success. Have you been accumulating any health expenses to be able to dive into it earlier by any chance? Which investments are allowable for yours? Thanks for sharing this!
-Lanny
Lanny – I keep great records on expenses, as I’m sure most of this community does. So over the years that adds up (mainly from the wife) and I can pull about a third of the available funds if needed with no tax consequences. But I will do all I can to not draw the account down. When I was in the dark about HSAs, the HR lady at my former employer advised me to use the HSA to reimburse myself for medical expenses “just swipe the debit card, easy”, so that’s what I did those first couple of years. That was BAD advice. Once I saw the light, I began to cover those expenses out of pocket and consider the HSA like a separate IRA. I don’t have the stomach to go back and see what the balance would be had I maxed it out every year and left the money alone.
My new employer uses Aetna with a variety of great Vanguard funds. Only $4,800 in that account – but its growing fast. The old one I moved to Wells Fargo (they had no monthly fee for balances >$10,000 and I got them to waive the $2,000 cash balance requirement with a phone call since I had two HSA accounts and wouldn’t have activity with them) but it only had WellsFargo funds with about 0.6 to 1%+ fees. They recently sold it to Optum Bank. I was considering moving those funds to the current one with Aetna to avoid those high expense fees so I called Optum to ask some questions. They’re going to honor the no monthly fee and no cash requirement. And the best part? Starting in 2017 they will have Vanguard funds available for the former Wells Fargo customers! Would’ve had no idea had I not called and asked.
HSAs are going to be very important in the potential future of a more expensive Medicare. Most of us will get sick before we get to retire. One misconception with HDHPs is that your expenses will be higher – no, you still get your plan’s negotiated payment rate for services – you just get to pay as you go rather than fork over higher premiums for services you may not use. I do not like the mutual fund options in my employer’s plan, but unlike 401ks, my understanding is you can port an HSA while you still work for the same employer. That might increase the fees, but if the investments were more to one’s liking, it could pay off – just move the money from one HSA to the other at the end of the year. Also, if you find you have unexpected extra dollars at the end of the year, you can make an additional contribution outside of your paycheck, up to the legal limit, until Tax Day – just be sure the payment is marked for the current tax year and that you include it when you file. Best kept secret in finance, and in terms of free money, some advisors recommend allocating savings to your 401K to the amount of the match, then HSA to its max, then rest in a Roth or in the 401K. I also did not know you can use HSA to pay insurance premiums while on unemployment… but because of the possibility of claiming past reimbursements, I could claim those dollars back from the HSA in the future. Very flexible and a great idea to participate. Unfortunately, the very-high deductibles on the open insurance market make it less attractive than when participating in an employer sponsored HDHP, but still doable, for some. Still rather have that money in my account than in the insurance company’s pocket.
CityKir –
Thanks for the post! Can you explain the “additional contribution” outside of your paycheck once more? VERY curious : )
Also – yes, you can keep track record of your medical expenses, my service even allows storage of receipts, etc.. And then you can always go back and use those claims if you ended up paying them out of normal checking/savings.
Thanks again for the comment – definitely shed some more light if you can on the one item! Talk soon.
-Lanny
Glad to hear the new strategy is going so well! I have thought about utilizing this strategy quite often, at least for the 401k. I don’t really care for HSAs. It really can be an amazing way to maximize your tax strategy. I’ve generally held off on this due to my retirement goals. I’d personally rather invest as much as a can in a brokerage account. For my goals, I need my brokerage account to be huge in 15 years (when I want to retire). I suspect that my 401k, will just be a supplement by the time, 67 or 70 years old comes around. The hope is obviously that my tax rate on my brokerage would just be 15%, the dividend tax rate.
It is going to be so fun to see where this whole dividend investing community is in 10 to 15 years! I fully expect the numbers to be astonishing and strategies extremely varied.
DStacks –
Thanks for the comment! I agree, most of these will be supplemental and or transitional accounts. Why the 401K > HSA? I can see that from an investment option standpoint. Should consider though the added tax benefits of Pre-Fica if through an employer and the ability to use if you have un-reimbursed health expenses. Just a tip!
And of course, keep dividend investing. How many years have you been cranking in?
-Lanny
My health expenses are minimal and the fee charges by the HSA admin fees knocks out any potential savings I’d get.
My 401k is a Non-Prototype Fidelity account, so I can invest in whatever I want, not limited to mutual fund picks like most are. 🙂 Which is huge. My HSA would be limited.
Whoa –
Non-prototype fidelity, never even heard of this, sounds awesome – aka you can invest into stocks then. Damn you! I can see the benefits there, for sure. Obviously – whichever works and fits your style. I’ll have to do some reading on a non-prototype account.
-Lanny
I love HSAs – one of the most overlooked accounts for tax advantaged savings since it’s the best one especially if you’re getting it through your employer and saving on FICA as well. The fact that you can take out the money tax-free for medical expenses(or to cover prior medical expenses) is huge since you get tax-savings up front, tax-free growth and tax-free distributions. It’s not like any of us will be lucky enough to have no medical expenses in the future!
Time –
You pretty much summed up every damn benefit from the HSA! Love that you share in the passion for it. NOW… let’s just raise those limits!! Thanks for sharing.
-Lanny
You also have the ability to manage your HSA assets at which every brokerage account you want, not simply the one your employer has a relationship with.
TJar –
Thanks for your post. Exactly – you can manage the HSA assets fairly easily, as it relates to accounts, moving them and even tracking/access to use the funds from keeping track of your medical expenses that you pay for out of pocket. Love the HSA, hands down.
-Lanny
Great that you are able to max out your 401k like that. I can’t do that, but I have been increasing my contributions lately in order to ease my tax burden. I’ve gone from 10% at the start of the year to 25% just last week. I was getting annoyed with how much I’ve been paying in taxes, so I’m trying to experiment with how much I can increase my contributions to without putting a crimp in my non-retirement financial goals.
Sincerely,
ARB–Angry Retail Banker
Been doing this for years. Max out 401k,, HSA, Roth IRA. In that order usually, need the deductions from the 401k and HSA in order to get income low enough to do Roth.