25 thoughts on “Strategy Adjustment – Taxes… (Series, Part 2)

  1. I’m not familiar with all the different US tax-advantage accounts but sounds like your strategy is very similar to what I’m deploying here in Canada. Here in Canada we have the RRSP (tax deferred retirement account) and TFSA (tax free account). If you put money in RRSP you can tax deductions. It certainly makes sense to contribute to RRSP every year and use the money in RRSP for stock investing. Best of all, if we invest in US dividend paying stocks in RRSP, we don’t have to pay the 15% withholding tax. Win win for me.

    • Tawcan,

      It’s similar in the sense that that it’s another tax savings now, tax deferral account, that’s for sure! There will be part 3, where I bring this all together, the figures are quite startling, let me tell ya. I saw you had a similar article out on what it will take to be free; $1M eh? You’ll be there soon enough!


  2. Thanks for the article. Currently, I am not utilizing the HSA, so I have some homework to do. I not sure how this will apply to me until I fully read all the nuances.
    Cheers D4s

    • D4S,

      Of course. Downsides to this could be a monthly fee, which I luck out on from the employer paying – as well as 20% penalty (I believe) if you access early for no medical reason vs. the 10% fee we would have to pay as a penalty for other retirement vehicles. However, it’ll be pretty easy to rack up medical bills in order to tap this account as early as you’d like. It’s a fairly neat concept – with an ever better tax saver as it is not taxed via FICA! Check it out and please let me know your thoughts after you do!


  3. Great Article(s)! I have been contributing to an HSA, but not fully and also to my 401(k). I also have not maxed out my 401(k). In fact it is actually a Roth 401(k) do you have any thoughts or ideas on that since I am obviously paying the tax up front.


    • TDM,

      I used to do the Roth 401(k) and only up to the match (5%). I literally JUST switched a little bit ago/month ago to the Pre-Tax/Traditional 401K. AND THEN – Decided to MAX it out, as the tax savings are just AMAZING. See that article here: https://www.dividenddiplomats.com/strategy-adjustment-taxes-series-part-1/

      Further – MadFIentist, I talk about his articles in the post, has a great resource and layout of the plan where you can actually convert these traditional 401K contributions to traditional ira (once you leave) and then to the Roth, it’s interesting. Anything else? Let me know.


  4. I was just getting started with the HSA this year especially since my employer had a great match. I don’t remember the exact amount but it was something like 50% of the max contribution which is big amount. Especially if you don’t have to tap that money and can let it grow and compound undisturbed until some form of retirement. Of course I’ve since been laid off so it’s not a perk that I’m privy to anymore.

    Planning for healthcare in early retirement is one of the hardest things because the expenses are so unknown. The best thing you can do is keep yourself in good shape but even then there’s always something that couldn’t be avoided due to an accident or genetics.

    • JC,

      Oh wow – 50% of the max?? NO WAY. That would be awesome. Sorry to hear about not being able to access that type of account.

      You said it and nailed it – healthcare is so unknown. What could happen to your health is also unknown – diseases, genetics, accidents and just plan bad luck. Planning for it more now has also led me to see how unkown it could actually be. So intense.


  5. I currently max out my HSA which my employer contributes $650 a year. I will continue to do this as long as possible since it is tax free money.

    Although I do still use the Roth401k up to the max that my employer will match 100% of, which is 5%.

    Then I will also continue to max out my RothIRA every year. Then everything else will go to my taxable account.

    Thus far this strategy has been working well for me but I am always always open to revisions. I look forward to part 3 of this series. Thanks for sharing!

    • More Div,

      Nice! So let me ask this – are you still contributing $3,350 or are you then only able to do $2,700 because of the $650? I have seen others do “other” things?

      Ah, and I see – as you know, I used to do the roth 401k and then recently switched. I made a choice to work on the plan and strategy in tax advantaged accounts to set it up to convert to the roth at a point when I need and then even to access that when I’m ready. Obviously it’s sweet that you are maxing out the Roth IRA, as I had done that as well and props to you for taking advantage of the contribution limits that are there and investing as opposed to spending. We are all doing great things.

      Have you checked out MadFIentist yet? Let me know if you do/decide to read a few of the articles. I am sure my part 3 is just around the corner!


      • I discussed it with mu benefits resource center at work…. and they were the ones who said the $2700. I didnt do any research and I just went based on what they said.

        Yes, I have actually read the articles that you speak of. I am currently sticking with the Roth401k as I am not totally sold on it being more advantageous for me to do the conversions later on. It is really a subject that I would need to research more!

        • MD,

          Gotcha, gotcha. Interesting, very interesting.

          Here’s the big positive – you are saving and investing. That is an amazing think – whether it’s this account or that account – it’s a tomato or tomatoe, eh? In the end – it’s all okay and we all will be better off, because we are SAVING! So this is good, but let me know if you research and either come to same conclusion or change! Curious on what you find.


  6. Looking forward to the next one covering MAGI. Don’t forget the evil twin FSA – I say evil as it’s generally use it or lose it but carries some of the same tax benefits. And some employers offer both.

    • Charlie,

      Of course – those FSA (Flex spending accounts) can be very tricky if you are in one and need much more monitoring than the accounts in these articles. The use it or lose it kills, for sure. If anyone has those – definitely drain them before 12/31… or “ouch”


  7. I have an idea for a part 4 if you wanna get real crazy! While you’re saving those taxes now, you will inevitably be paying some form of taxes in the future on this money. What is the impact of the tax-free growth and what is the time value of money savings (real savings) on the other end? with some baseline assumptions of course. am I too far down the rabbit hole? yea maybe, probably.

    good post!

    • DStacker,

      Great question and points to make. However – it’s all going to really depend! If you are able to perform the conversion as you are retiring early – you may be able to reduce your tax impact at a lower rate then versus the 25% federal tax rate now, does that make sense? And then – you more than likely need to be investing the tax savings now, as well, in order to “defeat” the after-tax Roth accounts. I like the rabbit hole and I think the hole will tell you “it depends”? What do you think?


  8. How interesting. We’ve never thought to do some of what you mentioned here. Time to look at stuff and maybe make some changes….as we always tell the kiddos, there’s something new you can learn everyday. Thanks for sharing this! 🙂

    • Ann,

      Thank you very much for stopping by : ) means a great deal. Which one’s do you think more about? Which one intrigues you more? Any questions? Please let us know! I hope this has helped!!


  9. I’ve seen these new posts you’ve been making. I’ve followed you and guys like Jason Fieber for a while now. I personally have been maxing my 401k and Roth IRA for the past couple years and have been primarily following a bogleheads approach. It seems to me you’re putting less emphasis on dividends and more onto the pre-tax and index approach (unless of course your 401k allows individual stock purchases).

    I’m just curious what your opinion is on picking your own individual dividend stocks vs. indexing? Personally, I’ve done a little dividend buying on the side and I am up 30% for the year using Robinhood/Loyal3 for fee free investing. I just don’t know which approach I should take to maximize return and I see people get in some pretty heated debates on indexing/dividend approaches.

    Also what about dividend indexes? It seems like a great way to get diversified quickly in dividend stocks, but of course takes away the ability to pick value stocks since you’re constantly buying them all high or low.

    Thanks for any input!

    • Sean,

      Phew – nice comment, give me a few minutes here to respond haha. Here we go:

      First – THANK YOU for following us, seriously – T H A N K YOU! That means more than anything, more than dividends, seriously.

      Secondly – NICE job on saving so much – maxing out the 401k and Roth IRA is not a small feat – that’s F*ING $23,500 we are talking here, aka $2K essentially per month being pumped into the market – SICK. I love it.

      Third – That is definitely the question I asked myself – I think I also showed it in my first part of the series. I will not stop picking dividend paying stocks, no chance in hell I stop. The kicker is – I won’t be able to do as “much” individual stock picking as I used to – as $20,850 ($18K + $2.85K) is a lot – I’ll still get quite a bit back due to reduced taxes and will be able to invest in individual stocks within the IRA and taxable account – roughly $16,000-$18,000 aka, HELL YEAH. I do individual stocks in the IRA and Individual Taxable account; its something absurd like $99/trade in my 401k. So I love both, actually. WHY? Because my funds/etfs that I am in within my 401k and HSA are the S&P 500 and the total stock market index aka – they pay quarterly dividends and increase them very regularly. One is around a ~2.25/2.30% yield with a 7-10% growth rate – which is awesome, and the other is around ~1.75% yield with a similar growth rate – not too bad either. So no matter what – I’m collecting dividends on that. But to repeat – I AM NOT STOPPING ON PICKING STOCKS AND INVESTING!!! In fact, there shouldn’t be THAT much of a slow down – as $16K-$18K is a sh*t ton in my opinion.

      Lastly – dividend index ETFs/Funds – I believe it’s a tough call. Look at the expense ratios. Thats why I have the funds I have – because the expense ratios are next to nothing, talking 0.04% and 0.16% aka – very minimal. Whereas, the dividend fund or etf may have a higher expense ratio. Sad thing – my employer doesn’t have any with the services they use.

      How’s that Sean? Why are you choosing Roth IRA vs. tradition IRA at the moment? Mixing the tax allocation or over the MAGI limit to invest into traditional IRA?


      • I usually make too much to do the TIRA, however sometimes I can claim a partial credit. I definitely think taking the tax benefit NOW is the best option if it’s available to someone though.

        And thanks for the props! You guys are all very inspiring. It’s crazy how many people I work with look at me like I’m crazy when I tell them I plan to retire between 40 and 50 years old and how much I save. It’s nice to talk to like-minded individuals.

        And your explanation sounds good. Both indexing and dividend investing are viable options. I will probably do a blend of both like yourself. I just question my ability to pick stocks on my own versus simply buying the market. It sure is fun though and I’m doing great so far! Plus I’m paying no expense ratio at all picking them myself :).

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