Accounts to Consider If You Want to Save More

1 in 3 Americans are planning to make finance-related New Year’s resolutions, and 31% of those people with a financial resolution want to save more, according to a poll from WalletHub. If you’re in the same boat and want to save more, this episode of The Agent of Wealth Podcast provides a detailed overview of all the savings vehicles. In it, host Marc Bautis walks through a checklist that covers all the factors you should consider when opening up or contributing to a savings account.

In this episode, you will learn:

What a savings rate is, and how it fits into the three-legged financial stool.
Savings options within employer benefit plans, including employee-sponsored 401ks, HSAs, stock options, and more.
Investment and retirement accounts to consider, including the pros and cons of a Roth versus traditional account.
Smart ways for business owners to save
Ways to save for children or grandchildren.
And more!

Resources:

Complete the Checklist | Schedule an Introductory Call | Bautis Financial: 7 N Mountain Ave Montclair, New Jersey 07042 (862) 205-5000

Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. On a recent podcast episode, I talked about Financial Issues to Consider at the Start of the Year, and in the episode I spoke about the importance of knowing – and improving – your savings rate.

What Is Your Savings Rate?

Your savings rate is simply the amount you save each year, into any type of account or vehicle, divided by your income for the year.

Your savings rate is one leg of the three-legged financial stool. The second leg is when to start saving… and the answer to that is obviously always as soon as you can. The third leg of the stool is how to start saving.

The Three-Legged Financial Stool

Your savings rate.
When to start saving.
How to start saving.

Your decision on how to start saving – which is interchangeable with where to start saving – makes a big difference in how much wealth you accumulate over time.

So on today’s podcast episode, we’re going to talk about that third leg of the stool and, specifically, what accounts you should consider if you want to save more.

The first step here is that you have to have cash to save. If you don’t have a handle on your cash flow, or if you find that there’s no money left over after each paycheck, this is a moot point. If you’re in that boat, you need to get a spending plan in place – which will help you understand where your money is going – before you think about devoting an account to saving.

Before we get into the details, here are some of the high level things you should consider when assessing which account is best for your savings:

Tax consequences. Like every other financial decision you make, you should analyze the tax consequences of the different savings options to ensure you’re optimizing your tax situation. When I say tax consequences, I’m really talking about whether you’re saving in:

A taxable vehicle
A tax deferred vehicle
A tax free vehicle

If you’re saving in a taxable vehicle, you’ll have to worry about interest, dividends (or income) and capital gains. If you’re saving in a tax deferred vehicle, you may not owe taxes now, but you will when you access that money sometime in the future. If you’re saving in a tax free vehicle, you’ll never owe taxes on that money again.

Now, if taxes were your only consideration, your decision would be pretty straightforward. But you have to think about other things, like liquidity.

Liquidity. This refers to how quickly you can access the funds. Most of the savings vehicles that are tax efficient, like retirement or education accounts, are not liquid without losing the tax benefit that you used them for in the first place. And, you could potentially owe a penalty on it or you may save into an investment where the funds aren’t readily available.

Other examples include real estate investment properties, private investments, annuities… There’s nothing wrong with these types of investments, you just have to make sure that you’re okay with them being illiquid, or partially illiquid. Even some CDs or I-bonds are illiquid as well.

Risk and return. Depending on the savings vehicle, it’s possible that your money will be fully liquid, but it might be subject to market fluctuations. So when you need to access the money, the value may have gone down from when you initially invested your money.

Conversely, you could take no risk with your savings by keeping your cash under the mattress. But the purchasing power of that money will diminish over time because of inflation. And, there may not be enough growth or income to meet your financial goals. So you really have to look at the tax consequences, liquidity, and risk and return.

I recommend making a list of the pros and cons of each vehicle, then come up with a strategy based on the criteria that fits what you’re trying to do with your savings. Maybe it’s not just one savings vehicle, maybe it’s a multi-tiered approach.

Savings Options Within Employer Benefit Plans

This podcast episode correlates with this month’s planning checklist, which is an interactive PDF that we offer for free download. I’m going to talk a little bit about how this checklist can be used to create structure or framework around determining the best savings option for you.

Download the Checklist

Let’s start off with the premise that you want to save more – and you can save more – but you’re not sure how to do so. I would start by looking at your benefits package from your employer.

Does your employer offer a 401k match?
Are you taking advantage of the 401k match?
Could you increase your contribution to get the maximum match?

This is essentially free money, so you want to take advantage of it.

Now, there is also a tax incentive to saving in a 401k or a retirement account. If you’re saving in a Roth, you probably have the tax incentive at the end in retirement when you’re taking money out. If you’re saving in a traditional 401k, it may help you lower the taxes that you have to pay in the year that you make the contributions.

You probably want to stop working at some point in the future, so having money saved in a retirement account or in some other savings vehicle will make that possible.

Also, on the topic of employer benefits, you also want to check:

Does your employer offer a health insurance plan with an HSA?

HSAs offer a triple tax benefit that you don’t see in any other type of savings vehicle. A lot of the savings vehicles are tax efficient accounts, as we discussed, so they provide you the tax benefit when you make the contribution or when you withdraw the money in the future.

HSAs give you the tax benefit on both sides: you get the tax deduction when you make a contribution, and you do not owe taxes when you take the money out. But there are some rules of HSAs that you have to adhere to.

Some people choose not to utilize HSAs because of the type of health insurance plan that they’re attached to, which is called a high deductible health plan, but I think they’re worth analyzing if it’s an option your employer provides.

Another thing from the employer benefits side:

Does your company offer a stock purchase plan?

Some companies offer the ability to purchase stock of the company at 10% to 15% below the market value. Now, there are some things that you want to take into account here… you probably won’t be able to immediately sell the shares – you have to hold them for a period of time.

You also want to think about whether participating in an employee stock purchase plan will make you too concentrated in your company’s stock. The other consideration is, you could be putting a lot of eggs in one basket, because your employment is tied to that company.

So there are some things to consider, but it’s an area to look at for sure.

Another thing to look at is:

Does your 401k plan allow a mega backdoor Roth 401k?

In 2023, the regular 401k contribution max is $22,500 for an employee. The mega backdoor Roth 401k is a way to get an additional $43,500 into your 401k on the Roth side of it. Now, not every 401k plan allows this, but can’t hurt to check and see if it’s available for you.

Smart Ways for Business Owners to Save

If you’re not an employee and instead own your own business, you may be able to set up a SEP IRA, a solo 401k or even a traditional 401k. That way, you can increase the amount that you’re saving for retirement and get that tax benefit.

I’ve worked with people who knew that they could contribute $6,000 or $7,000 to a traditional IRA or a Roth IRA, but they didn’t know that they could contribute more as a business owner. Essentially, if you are a 1099 employee, or even if you own a LLC, you have options to be treated as a business and there’s different things you can take advantage of there.

Now let’s say you’re maxing out all of your 401ks, SEP IRAs, or whatever retirement plan you have, you may want to look into setting up a cash balance plan, which is essentially a pension plan. The benefit here is that you can put a lot of money into this.

The maximum cash balance plan contribution can reach as high as $341,000 a year. Now there’s other considerations – whether you have employees, your age, income – that come into play, and that’s how the contribution calculation is determined.

If you’re a business owner and you have minor children, you could look into offering your children paid positions within the business, which can allow savings in their name – which will be taxed at their income bracket. Going back to the idea of the three-legged stool, this is a good way to start saving early. Now if you do consider putting your kids on the payroll, I recommend talking to your CPA to see if it makes sense to do so.

Also, a lot of people think that because they have a 401K through their employer, they’re not eligible to save in another retirement vehicle. You still may be able to contribute to something like a backdoor Roth IRA. Even if your income is higher, it still may be an option.

There are many reasons why Roths make sense. They are more liquid than a traditional IRA or 401k, and they are tax efficient. Roths are a good consideration for someone who expects their income to be higher in the future, especially young people just starting out their work career.

One planning opportunity here is to save in a Roth account when you’re young, then switch and make pre-tax contributions when your income increases in the future. The reason for that is the pre-tax contribution will probably be at a higher tax deduction rate, because the higher your income is the higher the tax bracket. By having some savings in both a Roth and a pre-tax account, you’re hedging what could happen with tax rates or tax brackets in the future.

Smart Ways to Save for Children or Grandchildren

There’s also savings for your children or grandchildren, such as 529s. A new change made in The SECURE Act 2.0 allows you to roll over up to $35,000 of 529 funds into a Roth IRA, if the funds are not used for college. There are a couple of rules that you have to follow for the funds to qualify, but this new change will relieve some of the worry I see around funding a 529 account. No more wondering, ‘Well, what if my child doesn’t go to college?’

You’re also able to gift money, or save money for your children or grandchildren, into a custodial account. Now you do have to look at the implications of having assets in your child’s or grandchild’s name, especially when it comes to applying for financial aid, but this could be a part of a gifting strategy.

Savings Into a Regular Investment Account

You could also save into a regular investment account, but again, you have to consider the risk of any investment you take on. Some relatively safe vehicles include treasury bills and fixed income.

There’s still a debate on whether there’s value in the stock market right now. Over a long stretch of time, stocks have gone up. Some people prefer dividend investments, because as they wait for their stocks to go up, they get paid an income from the investment.

Tax deferred insurance options, like annuities and cash value life insurance, both provide tax deferral on the gain. Fees on some annuities have come down in recent years, making them more of a viable option. Again, they’re pros and cons in saving each of these two, especially when it comes to liquidity.

Saving for Emergencies

Another thing to look at is:

Do you have enough in emergency savings?

Related: Why You Need An Emergency Fund

You may just want to make saving simple by putting the money into a fully liquid savings account to use for emergencies.

Emergencies could mean a lot of different things, but one thing we’re hearing about more and more is company layoffs. I recommend running a mock layoff scenario to see how long you (and your family) could live off of your emergency savings should you lose your job.

Allocating Money Toward Liabilities

So far we’ve talked about saving to build up assets, but there’s another side of the balance sheet that you need to consider as well: Liabilities, or debt.

If you have extra cash, it might make sense to pay down debt. You’ll want to review the debt that you have and the interest rate you’re paying for each liability. You should consider:

What’s the benefit of having this debt?
What’s the benefit to paying off this debt?
Is any of the debt tax deductible?

Once you answer those questions, you’ll be able to see the return rate for paying down debt.

In closing, the approach I would take to improve your savings this year is to:

Figure out how much you can save.
Look at all the options you have, and the pros and cons of each.
Come up with a strategy based off of your options.

This interactive checklist can help put some structure and framework around that analysis piece, helping you identify the options that work best for you.

Download the Checklist

Remember, your ultimate goal should be to get your money working as best as it can for you. I come across a lot of people that save money into almost this black hole of a checking or savings account, where the money isn’t working for them. Going back to what we talked about with the emergency funds, that might be the best approach for you, but it’s not for everybody. You really should assess your goals and see how savings can help you achieve those goals.

If you need any help with the analysis, you can schedule a free consultation at bautisfinancial.com/call. And thanks for tuning in today.

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Episode 138 – Accounts to Consider If You Want to Save More