Alphabet Soup of Retirement Accounts (Retirement Planning)
On this episode, sponsored by Insuring Income, Tim Ulbrich, PharmD, sits down with Tim Baker, CFP®, RLP®, for the second part of the four-part series on retirement planning. Together they discuss the alphabet soup of retirement accounts including commonly used vehicles for accruing a nest egg.
Episode Summary
YFP Co-founders Tim Ulbrich, PharmD, and Tim Baker, CFP®, RLP®, discuss the alphabet soup of retirement accounts in this episode, the second part of the four-part series on retirement planning. Tim and Tim know that planning for retirement and building a nest egg can be overwhelming with so much to consider. In this episode, they break down common vehicles for building a nest egg into two main buckets. Tim Baker differentiates between tax-advantaged accounts administered by the employer and those administered by the individual. Tim and Tim spend time discussing how each tax-advantaged account works, including the contribution limits, catch-up provisions, and phase-outs where applicable. They get specific on how not all “buckets” are equal in terms of what you, as the investor or retiree, will receive. Due to the nature of retirement accounts and their relationship to the financial and tax plans, Tim and Tim share the importance of marrying the retirement plan to tax planning for the most benefit to the investor. Lastly, Tim and Tim explain that there are many factors to consider when determining the priority of saving among different tax-advantaged accounts, reference resources for listeners on prioritizing investments, and mention the services provided by YFP Planning and the YFP Tax team for pharmacists.
Links Mentioned in Today’s Episode
- YFP 272: How Much Is Enough? (Retirement Planning)
- YFP Planning: Financial Planning for Pharmacists
- Schedule a free Discovery Call with YFP Planning
- Insuring Income: Get Quotes and Apply for Term Life and Disability Insurance
- YFP 165: The Power of a Health Savings Account
- YFP Tax
- 2022 Important Numbers
- Your Financial Pharmacist Disclaimer and Disclosures
Episode Transcript
[INTRODUCTION]
[00:00:00] TU: Hey everybody, Tim Ulbrich here. Thank you for listening to the YFP Podcast, where each week we strive to inspire and encourage you on your path towards achieving financial freedom.
On this week’s episode, Tim Baker and I continue with the second of our four-part series on retirement planning. Last week on Episode 272, we discuss, determining how much is enough for retirement. This week, we take a step forward by talking about the alphabet soup of retirement accounts including commonly used vehicles when occurring a nest egg. Highlights from the show include differentiating tax advantaged accounts into those that are administered by the employer, and those that are administered by you the individual, how each tax advantaged account works, including contribution limits and ketchup provisions, and why not all buckets are created equal, and factors to consider when determining the priority of saving among different tax advantaged retirement accounts.
Now before we jump into the show, I recognize that many listeners may not be aware of what the team at YFP Planning does in working one-on-one with more than 270 households in 40 plus states. YFP Planning offers fi only, high-touch financial planning that is customized to the pharmacy professional. If you’re interested in learning more about how working one-on-one with a certified financial planner may help you achieve your financial goals, you can book a free discovery call at yfplanning.com. Whether or not YFP Planning, financial planning services are a good fit for you, know that we appreciate your support of this podcast and our mission to help pharmacists achieve financial freedom.
Okay, let’s hear from today’s sponsor, and then a jump into my conversation with certified financial planner, Tim Baker.
[SPONSOR MESSAGE]
[00:01:39] TU: This week’s podcast episode is brought to you by Insuring Income. Insuring Income is your source for all things term, life insurance and own occupation, disability Insurance. Insuring Income has a relationship with America’s top rated term Life Insurance and Disability Insurance Company, so pharmacists like you, can easily find the best solutions for your personal situation. To better serve you, Insuring Income reviews all applicable carriers in the marketplace for your desired coverage. Supports clients in all 50 states and make sure all of your questions get answered.
To get quotes and apply for term life or disability insurance, see sample contracts from disability carriers or learn more about these topics. Visit insuringincome.com/yourfinancialpharmacist. Again that’s insuringincome.com/yourfinancialpharmacist.
[INTERVIEW]
[00:02:31] TU: Tim Baker, welcome back.
[00:02:33] TB: Yeah, good to be back, Tim. Looking forward to part two of this series.
[00:02:37] TU: Yes, this is our second part of the four part series we’re doing on retirement planning. Last week, we talked about, How to Determine How Much is Enough? We ran through some mistakes scenarios and calculations to determine that number. This week, we’re going to start to get into more of the X’s and O’s on how to get there. As I mentioned, as we wrapped up last week’s episode, often when we begin to wrap our mind around, okay, this 3 million, this 4 million, this 5 million number and we begin to accept what that is and what we need to be saving each month to get there.
The next natural question is, all right, where do I actually invest the money? What are the vehicles and options that are available? That’s what we’re going to talk about this week, some of the variety of investment vehicles and we’re primarily going to focus on tax advantaged retirement accounts, but certainly acknowledge that there are a variety of ways to build a nest egg outside of just the accounts that we’re going to talk about. So that could be real estate, that could be digital currency and assets, business ownership collectibles, and knowing many individuals are building a base that comes from, maybe not exclusively includes, but comes from traditional retirement accounts. We’re going to focus our time there.
Another important distinction I want to make is that for our small business owners that are listening, we know there are several you out there. We will cover not in detail on this episode, but certainly there are other options from a business standpoint, SEP IRA, simple IRA, solo 401K. We’re not going to focus on those in this episode, but certainly, those are a valuable option to get us to our goal, as well.
Tim, we throw these terms around all the time in pharmacy as notorious for throwing around acronyms. We put together pharmacy and financial planning. I feel like it gets worse. So we throw around term 401K, 457, TSPs, traditional IRAs, Roth IRAs, HSAs. This is often when we’re speaking with a group of pharmacists where we start to see the eyes gloss over. Okay, I understand there’s options I need to take advantage of, especially from a tax standpoint, but there’s a lot to consider, this can be overwhelming. We’re going to break this down into two buckets to give ourselves a framework.
Those tax advantage accounts that are administered by the employer. Then the second bucket is those tax advantage accounts that are administered by you as the individual. So this distinction I think will help us begin to organize and have a framework for how we can think about different options that we have to save. Tim, let’s start with the accounts that are administered by the employer. Give us a rundown of the accounts that are available here and some of the distinctions between them.
[00:05:10] TB: The ones that are typically administered by the employer are going to be the 401K, the 403B, the TSP, those are the three primary ones. Then sometimes you run into things like the 457 plan, which is typically a bonus plan. Sometimes you see 401As, which are like 401Ks, except the participants aren’t making contributions to them. The one that we’ll talk about, synonymous with all the other ones is a 401K. The 401K, is the most popular profit sharing plan. Essentially, how it works is when you are hired by an employer. They’re going to say, “Hey, welcome to the team. As part of a benefit to working on our team, we have this 401K that we’ve set up through fidelity or whatever, whoever the custodian is. These basically are funded through salary deferrals from your paycheck.”
Back in the day, you had to basically make that election yourself, but the Obama administration, I think, smartly made it, so you have to opt out. A lot of these plans, now you’re auto enrolled at a certain percentage into the plan, I think, based on your age into a target date fund. The backdrop of this, Tim is back in the day, when our dads were starting the career, the most prevalent retirement plan was a defined benefit plan, a pension. What happened over really started in the 80s and 90s, employers were starting to see how big of a burden that was on their own balance sheets, because they were basically carrying the lion’s share of saving for the employees retirement. The 401k was introduced, which is a defined contribution plan and that means that that risk of having enough save for retirement has shifted from the employer to the employee.
Now it is up to the employee to figure out how much they need to be different from their paycheck, where to invest it, and then how to distribute it tax efficiently in retirement. The problem is that we just aren’t necessarily good at that. The 401K has really taken off and now defined contributions will outpace pensions, as many of us know that do not have pensions. Participants make elective salary deferrals and for anything that doesn’t have Roth in front of it, contributions are not tax until they’re withdrawn. What this means is that, I’m a pharmacist, and I’m making $120,000 a year, and I put 20,000, just for round numbers, the maximum you can put in is 20,500, but let’s say, I put $20,000 into my 401K. The IRS taxes me as if I made $100,000. It goes in pre-tax.
Now the money is actually, it’s only going to be taxed either going in or going out. That traditional 401K, that $100,000 is going to grow and grow and grow. Then when we pour it out in retirement, that’s when it’s going to be taxed. If we think about this, say I’m going to 25% tax bracket at age, we’ll say 40, it’s not taxed at 25%. It goes in tax free. Now let’s say I’m at age 65, I’m retiring. I’m at a 25% tax bracket. If that $100,000, let’s say, it grows, but that’s going to be taxed at 25%. Your benefit, there’s really no benefit either way. The benefit comes if your tax bracket is actually lower. If you’re at a 20% tax bracket, that’s when you see some of the statements. That’s for the traditional. Now if you are age 50 and older, Tim you can make a $6,500 catch up.
Now all of these things are the same for a 403B, which is typically 401K you typically see for profit 403B, you typically see for a non-profit or hospital that type of thing. The 403B has an additional catch up and it says typically if you are a certain age and you have a certain years of service, you can put in as typically 15 years you can put an additional $3,000. So you get your 20,500 Plus the 6,500 regular catch up plus another 3000. So that’s just a funky thing with 403Bs. TSPs are very similar to all of them they have the catch-up, not like a 403B, but a regular catch-up. Their matches the same across, so TSPs is the Thrift Savings Plan, typically for military government workers, their match is 5%. The big benefit for the TSP is that they’re in basically five funds that are super low costs, which is not necessarily the case with the 401K or the 403B.
The appropriate use for these, Tim are typically when If the employer wants to provide a quality retirement benefit, without being required to make ongoing employee contributions. So you can have, you can have an employer that offers a 401K, but doesn’t put any match or anything into it, that’s up to the employer to do that. A lot of employers are doing this to incentivize their employees to save, but also as a retention, because you can have vesting schedules attached to it, which means if you leave after a certain amount of time, you don’t get that match. It’s a great vehicle if you have a young workforce, because you can accumulate savings over a long period of time. But the basically the risk is on the employee to do what they need to do to get to have an adequate retirement.
A lot of 401Ks allow for insert with withdrawals for hardships, you can take loans against it. Most 401K’s these days, same thing with the TSP and the and the 403B have a Roth component. The big disadvantage here, Tim, is that oftentimes a 401K can be expensive. So typically, the rule of thumb is, the smaller the employer, the more expensive the 401K is to that individual participant. I’ve seen it, where all in cost on a 401K is almost 2%. So think of that, I have $100,000 in a 401K, $2,000 per years coming out either to pay an advisor expense ratio or things like that. Whereas something a TSP, it’s like, three basis points, which is $30, compared to 2000.
Then the other disadvantage is that, it’s not going to guarantee an adequate retirement benefit as a pension would. Oftentimes, again, smaller 401K is the investment selection won’t be great. That’s the main one. Again, all of those, the TSP, the 403B are going to be very, very similar to that without with some minor nuance. The 457 plan, which some people will see is a non-qualified tax advantage, deferred compensation retirement plan. This is typically for people who work in state government, local government, even some nonprofits. This is often another bucket that you can put up to $20,500 into. It’s the same thing they’re typically not taxed until it was withdrawn, but often those are available to the creditors of that. If you work for a local government that goes bankrupt, then you could potentially lose that money, which is problematic. That’s a big thing that some people will see as a 457. So typically, work on the 401K, the 403B first and look at a 457 after you’re maxing that out already.
[00:12:37] TU: Tim, correct me if I’m wrong. When I was at one university, we had the 457 available with a 403B and a 401A, but the 457 amounts was on top of in addition to –
[00:12:49] TB: Correct. Completely separate bucket, yeah. Sometimes we get that – we’re going to talk about those administered at individual levels, some people say, “Well, if I put 20,500 into my 401K, can I also put money into an IRA?” So they’re separate buckets, just like the 457 is a separate bucket that’s available to you.
[00:13:07] TU: Great synopsis. That was covering our first bucket, which is those that are administered by the employer, as Tim articulated, really looking at those interchangeable 401K, 403B, TSP, typically for profit, not for profit, those that work for a federal government agency organization. He talked about the contribution limits per years, some of the catch-up provisions after the age of 50. Then the additional one for the 403B. Then making sure we’re not confusing, a Roth 401K, Roth 403B with a Roth IRA, which we’ll talk about here in a moment. I think as we see the Roth employer sponsored accounts grow in popularity, there’s some confusion among okay, I’m contributing to a Roth 401K, can I also contribute to a Roth IRA?
The answer to that is yes, there are some considerations there, but totally separate. One administer by the employer when administered by the individual. Let’s shift gears, Tim to that second bucket. Those administered by the individual. Two, subcategories here that I want to talk about would be the IRA accounts, both the traditional and the Roth IRA. Then the second would be an individual that wants to invest in a brokerage accounts. Let’s start with the IRAs differentiate the traditional IRA, the Roth IRA, some of the income limits and considerations for pharmacists that would contribute here.
[00:14:22] TB: Yeah. So same thing, when you see traditional or no precursor at all just IRA, you’re going to think pre-tax, when you see something Roth, you’re going to think after tax. The traditional IRA is a retirement account. It’s the traditional individual retirement account. It is an account that you either set up yourself so you go to something like Fidelity, a Vanguard, TD Ameritrade, a Betterment and you basically open it up or you can work with an advisor and they’ll basically open one up to advise for your benefit.
The traditional IRA is funded with pre-taxed dollars. Again, this is a separate bucket away from the 401KL, the TSP, etc. you can contribute up to $6,000 per year, plus $1,000 per year catch up if you’re age 50 or older. Now, anybody essentially with earned income can contribute to a traditional IRA. It’s subject to phase out deductions. So what does that mean? If you are a single individual, and you make anywhere from 68,000, to $78,000 like AGI Adjusted Gross Income, then once you get to $78,001, you can no longer take a deduction for your IRA. I’ll give you example on the other side, so if you make less than $68,000, so $67,999, you can deduct 100% of your say $6,000 deduction or contribution. It phases out, which means that once you get to that midpoint, so 68,000, to 78,000 the midpoint is 73,000.
If you put $6,000 in you can deduct 3000, but then you can’t, which is half of it and you can’t deduct the other 3000. This is really good for people that are listening to the podcasts that might be fellows or residents or maybe they’re in school, and they’re working and they’re trying to save some for retirement, typically, pharmacists are not going to be allowed to make a deductible contribution. So just to give you an example, if I’m out there, and I make $60,000, which is below that, and I’m single, and I make below that threshold, and I put $6,000 into my traditional IRA. The government, the IRS looks at me as if I made 54,000. So similar example, as I used before.
Now, the difference between the IRA and the 401K is the 401K is coming out of your paycheck. It’s not basically hitting your bank account. This is typically funded where it hits your bank account and you’re technically contributed into that with after tax dollars, but you’re just deducting it on your 1040 when you go to file. That’s a little bit of the nuance. The phase out, if you’re married filing jointly is 109 to 129, which again, typically for a lot of pharmacists if they’re dual income, they’re going to be above that that threshold. The same thing as, so that $6,000 goes in pre-tax, it gets invested, it grows tax free. Then when we pour that out in retirement, when we withdraw it in retirement, that’s when it’s taxed. Again, it’s either tax going in or going out.
The Roth is the one that’s tax going in. The Roth IRA is an account that’s fun it with after tax dollars and it stays after taxes. You’re not going to take a deduction. So basically, it’s the same thing, you can contribute up to $6,000 plus $1,000 after age 50. Now, and this is an aggregate, if you were to contribute $4,000 a year to your traditional you can only contribute $2,000 to your your Roth IRA. This is subjected to phase outs to actually contribute. So what that means is that once you make as a single person, once you make the phase out is 129 to 144,000. Tim, once you make $144,001 the door slams shut, and you can no longer make a contribution to the Roth IRA. For married filing jointly that ranges 204,000 to 214,000. So if you’re a couple and you make more than 214,000, you can’t directly put money into the Roth IRA, which then gets into that, you fund a traditional IRA, you got to go through all those rules that we talked about and then you can do a backdoor Roth IRA, again easier to explain, harder in actual concept.
To just reiterate, if I make, we’ll use the same example. Let’s say I make $60,000. I put $6,000 into a Roth IRA. Now, the government looks at me as if I made $60,000 that $6,000 that goes in, it grows tax free. Then when I pour it out in retirement, because it’s already been taxed, that $6,000 is all mine, or whatever it grows to. That’s the big thing that we often talk about is like, if you have a million dollars in your traditional IRA at the end of the rainbow, when you’re going to retire, you don’t have a million dollars. If you’re in a 25% tax bracket, you actually have $750,000 and the government has 250,000. If there’s a million dollars in a Roth IRA or Roth TSP or a Roth 401K, that money is yours. That’s super important to remember. I think I hit everything with Roth.
[00:19:34] TU: Yeah. Then again, Tim, just to zoom out for a moment so in the first segment, we talked about the big security number, what do we need at the end of the rainbow at the nest like three, $4 million. We back that into, okay, what do we need to be saving per month based on a set of assumptions, asset allocation, risk tolerance, all those things? Maybe that number is 800 1200, 1500, whatever it is per month. Now we’re talking about where does that go, right? So we started with employer counts. Is that a 401K, for profit 403, not for profit TSP federal government? Or and or are there individual options, traditional, perhaps maybe not a deductible option there for many pharmacists based on income or a direct Roth or backdoor Roth, depending on income limits for pharmacists.
If you put these two together, and where we see many pharmacists beginning to build their foundation, again, not the only place that we’re going to be investing 20,500, certainly more than that, for those that are listening, that are in that catch up age, older than 50. Then on the individual side $6,000 per year, so 26,500 per year between the two of those and that 20,500, Tim is not including any employer match as well, right? That’s employee –
[00:20:46] TB: Yeah. If you include the employer match, and anything else they give you, I think the number can go all the way up to 61,000. As long as the employee and the employer match doesn’t exceed, 61,000 you’re good to go, which that’d be nice if you got that much in a match.
[00:21:02] TU: We put the two of these together. Again, not investment advice, but we put the two of these together, and we’re now north of $2,000 per month towards our savings goal. Is this the only way we can invest? Absolutely not, but these two tax advantage accounts, and there’s a lot of strategy and consideration here. Tim, you mentioned it a few moments ago, tax bracket today, tax brackets in the future, what else is going on in terms of the tax situation, another great example where we need to marry the tax plan with the financial plan, but a really good place to begin to think about the foundation for our investing.
[00:21:33] TB: Yeah. That’s a common question that we have, is like, should we put in Roth, we put it in traditional, should we be putting it in taxable, which we haven’t talked about, the brokerage account, which we can talk about here in a sec. The answer is yes, all of them. Because what we do when we try to build a retirement paycheck, we’re trying to get that money out of those tax advantaged accounts at the lowest tax rate possible. The other thing at the sprinkle in is oftentimes what use the brokerage account for, so often you use a brokerage account for an early retirement or to delay claiming Social Security as long as possible. So you increase that percentage of a known income stream from the government that’s inflation protected, and that is a bigger part of your percentage of income, that’s huge and a lot of people will not do that correctly.
Before we get to the Brokerage account, the last thing I’ll say about all these accounts that we talked about, so far, the 401K, TSP 403B, Roth traditional IRA, the other one that’s often synonymous with a traditional IRA is a rollover IRA, that’s typically, when you’ll see that’s also pre-tax. Worth mentioning for all of these accounts is that if you take non-qualified withdrawals, which that’s typically when you take money out before you’re 59 and a half years old, you’re subject to a 10% penalty along with paying the tax. That’s basically discouraging you to rob that account for a car, or a home downpayment or things like that. There’s exceptions to that rule, but that 10% penalty it’s a good way for you to keep that money in there.
Again, we talked about gratification, sometimes it’s really hard for us to lock that money away and not use it until the future. So the brokerage account, Tim, is the last account that we can talk about, and the brokerage account is, it’s a taxable account. It’s an account that you can set up through any of those custodians that I mentioned. It’s funded using after tax dollars. This can either be set up as an individual account, so in your name, just like all your retirement accounts or a joint account with a spouse or a partner. The contributions to this are unlimited. With all these other accounts, we’re saying, “Oh, you can only put $20,000, 500 or $6,000.” Here’s have at it, if you if you get an inheritance, or you’re maxing everything out, and you can put five grand a month or whatever into an account, you can do that.
You typically use this when you’ve exhausted your retirement contributions previously mentioned. The other one that we of course, always mentioned is the HSA, it’s another bucket, that’s good. You typically use this account when you’ve exhausted those things or if you’re doing something else like, we often use this account for a tax bomb for a non-PSLF strategy. It could be for something that –
[00:24:23] TU: Early retirement.
[00:24:24] TB: Yeah. It could be something that’s an early retirement. So if I’m going to retire at age 55 and I’m not going to be, I can’t collect on my other accounts until I’m age 59 and a half, you would use it for that or if you’re saying okay, I’m going to retire it 62 or 65. I’m going to delay to claim Social Security to age 70. I’ll use that account from that as well. Those are typically or the last one, which is not necessarily retirement related. You might say, “Hey, Tim, I want to basically buy a piece of real estate investment in 10 years.” I’m like, “Well, that’s probably long enough time horizon where we probably should do something other than a CD or high yield savings account.” So let’s build a balanced portfolio or something along those lines that we can get a little bit more return for a little bit more risk.
The advantage to the brokerage account is the greatest flexibility, there’s no penalty to withdraw, as I mentioned from the other accounts do, you can recognize losses to offset gains, that’s called tax loss harvesting. That’s one of the big disadvantages that when you put in will use the $6,000. Tim, I put $6,000 into my Roth account or my traditional. When we say it grows tax free, what that means is when you buy mutual fund ABC at $100 per share, when you sell it and withdraw the account and say it’s $300 per share in the future, there is a gain of $200 for that investment.
Inside of a Roth inside of a Roth IRA, a 401K, a traditional IRA, you don’t have to pay tax on that $200 per share gain, in a taxable or a brokerage account you do so what that means is that you’ve contributed after tax dollars, you made the investment, you have a 200 per share gain, you have to pay either long term capital gains on that, which is typically 0%, 15%, or 20%, most pharmacists are probably going to be in the 15% bracket, or short term capital gains tax, which means you’ve held it for a year or less, that’s typically ordinary income, which is 24% tax bracket plus whatever, in your state. So that’s the big disadvantage that you’re taxed multiple times on that investment, but it allows you flexibility to do what you need, move money in and out. The investment selection is yours and there’s typically less fees, because you don’t have that big administrator typically hanging over it like you do in a 401k or even an IRA.
We often see these, Tim with employee stock purchase programs, so if you’re in an ESPP with your employee, employer, they’ll put those dollars in a taxable account, typically RSUs are granted and they’ll put those dollars or shares and investment accounts, ISOs, that type of thing, as well. There are specific scenarios where you’ll use this, but the brokerage account, again, is often one that we don’t talk about enough for retirement purposes. Sometimes I don’t like to use it especially the further away you are for retirement, because you could say, “Hey, Tim, this is for retirement.” But it’s like, just kidding. Five years later we’re going to use it for something else.
Now that $50,000 that I accounted for in your nest egg calculation is gone, right? That can be problematic. That 10% penalty, although it stinks, it can be a good firewall for you not to take that money out, but this is another important account to utilize as we’re growing our assets to then disperse in retirement, and we want to make sure that we pick efficiently from a tax perspective from each of these buckets year over year.
[00:28:00] TU: Tim, when you teach this topic, and I think you teach it so effectively, you mentioned earlier that not all buckets are created equal, right? If you have a million dollars in a Roth, a million dollars in a traditional, a million dollars in an HAS, a million in a 401K, a million in a brokerage account, you don’t really have $5 million. I mean, I guess you do on paper, but there’s going to be tax implications that are different. The visual you give for the brokerage is it’s got holes in the bucket, right, because we’re putting money in after tax, and then we’re going to incur either short or long term capital gains doesn’t mean it doesn’t have value, you gave several examples where it could in terms of bridging to delay Social Security, it could be a short or mid-term type of purchase five, 10 years if you want to get some growth momentum for the market, don’t want that sitting in our checking account. So there’s value there, but we also want to make sure we’re looking at the right priority of how we’re investing.
I think one of the common mistakes that we are seeing, I think in part, just because of the availability in marketing around brokerage accounts is, are we putting money in a brokerage account and perhaps not taking advantage of some of the tax favored accounts we talked about. Is that intentionally the choice we’re making or are we not considering the tax implications by doing that?
[00:29:09] TB: Yeah. That’s one thing we talked about, it’s a prioritization. We see pharmacists that come in, they have 1000s of dollars in a brokerage account, but they’re not really taking full advantage of match or, and I get it, Tim. I’m not a hater. I get it, because a lot of times we’re marketed to by said company that says “Hey, buy this and invest and you’ll get free bitcoin or ETFs or stock.” I understand the want to scratch the itch and get in and try to make money and invest, but if you think about it, and again, it’s not a bad thing, because you can offset losses, but if I’m being taxed already on if I’m in a 24% tax bracket for that money goes in, and then I’m taxed another 10 or 15% when it from capital gains, but then you can defer that tax or in a pre-tax account or pay it after it comes out. I think that there’s a lot of meat on the bone with regard to efficiency, right? That’s one of the things we preach is just being efficient.
[00:30:14] TU: Yeah.
[00:30:14] TB: All of these have a place, particularly when talking about the in this retirement series, and there should be attention paid in a strategy and an allocation for each, just asking these questions if you’re listening to this, look at your balance sheet. Always comes back to the balance sheet and the goals. Look at the balance sheet, how much do you have in an after tax? How much do you have in taxable? How much you haven’t pre-tax? And take stock of where you’re at.
Once you know where you’re at, then you can outline where you want to go. Yeah, I think, it’s really important to look at the priority. Again, I don’t hate on anyone in that, who is doing that. It’s just a matter of focusing and say, “Okay, what is important, what’s not important? Sometimes if we want to do some stock picking and things like that in a brokerage account, let’s just keep it minimum 5% of the overall portfolio, and then we can go from there. I’m a big believer in keep it simple and keep fees low and set the right asset allocation, and then go from there.
[00:31:11] TU: While we’re talking about priority, we’re not going to dig in depth on this episode, because we’ve done it on many others, ruling to 165 is one example, but we can’t omit the HSA when we’re talking about priority of investing. Back to my visual of your brokerage account with the holes in it, the HSA is the bulletproof account, right? Depending on how we’re using that account, we have an opportunity to avoid taxes throughout. Obviously, if we have healthcare expenses that we need to fund, we can, of course, use it for that and have some tax advantages.
Got to be working for an employer, we have a high deductible health plan that dollars aren’t as big in terms of contributions that we’re going to see in a 401K or 403B, so 3650 for an individual 7300 for family in 2022. Some catch up provisions are again, but another tax optimization strategy that want to be considering. I hope we’re hitting that point home, intentionally is that I think one of the things our planning team does so well and a shout out to the integration between the planning and the tax team is, are those two things in sync? Are we are we planning with a tax mindset? Are we also thinking about the tax implications, but also building the financial plan around that as well?
Tim, I probably should have mentioned this earlier, but we’ve thrown around a ton of numbers in terms of contribution amounts, we’ve talked about phase outs and AGI limits, and maybe some folks are trying to scratch those down. Hopefully they weren’t doing that when they’re driving, but we have all these numbers available for use, you don’t need to memorize any of those. We’ve got a sheet that has 2022 important numbers, even beyond just what we’re talking about here and investing savings, you can go to yourfinancialpharmacist.com/2022numbers, again, yourfinancialpharmacist.com/2022numbers and get that information.
Again, this is our second part in a four part series on retirement planning. Next week, we’re going to come back to risk tolerance versus risk capacity, a very important distinction between those and how we begin to determine within these accounts we talked about in this episode, where we actually start to invest the money. Then finally, we’ll wrap up in our fourth part about how to build the retirement paycheck. The team at YFP Planning is ready, whether you’re new practitioner, mid-career pharmacist, someone who is approaching retirement, our fee only financial planning team of five certified financial planners and an in-house tax team, including a CPA and an IRS Enrolled Agent, ready to work with you to help build your retirement plan among your other financial goals as well.
If you want to learn more about the one-on-one fee only comprehensive financial planning services that are offered by YFP Planning, you can visit yfpplanning.com to book a free discovery call. Thanks for listening. We’ll see you next week as we continue the series on retirement planning.
[SPONSOR MESSAGE]
[00:33:50] TU: Before we wrap up today’s show, let’s hear an important message from our sponsor Insuring Income. If you are in the market to add own occupation, disability insurance, term life insurance, or both, Insuring Income would love to be a resource. Insuring Income has relationships with all of the high quality disability insurance and life insurance carriers you should be considering and can help you design coverage to best protect you and your family.
Head over to insuringincome.com/yourfinancialpharmacist or click on the link in the show notes to request quotes, ask a question or start down your own path of learning more about this necessary protection.
[OUTRO]
[00:34:27] TU: As we conclude this week’s podcast, an important reminder that the content on the show is provided to you for informational purposes only and is not intended to provide and should not be relied on for investment or any other advice. Information in the podcast and corresponding materials should not be construed as a solicitation or offer to buy or sell any investment or related financial products. We urge listeners to consult with a financial advisor with respect to any investment.
Furthermore, the information contained in our archived newsletters, blog posts and podcasts is not updated and may not be accurate at the time you listen to it on the podcast. Opinions and analyses expressed herein are solely those of your financial pharmacists unless otherwise noted and constitute judgments as of the date publish. Such information may contain forward-looking statements which are not intended to be guarantees of future events. Actual results could differ materially from those anticipated in the forward-looking statements. For more information, please visit yourfinancialpharmacist.com/disclaimer. Thank you again for your support of the Your Financial Pharmacists podcast. Have a great rest of your week.
[END]
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