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