Mo Money Mo Problems
So, you’ve maxed out your 401K contributions and have more money to save? It’s a nice problem to have and here’s my ranked order of saving options.
The best choice is a health savings account. This tax-sheltered savings is only available if you have a qualifying high deductible health plan. If you’re eligible, it’s the best deal around as it combines tax-deductible contributions with the tax-free distributions. You can read more here.
If you work for a public company that offers an employee stock purchase plan, maximize the contributions to it. If you auto-sell your shares each period, you’ll be locking in a 17+% return. That’s hard to beat. You can read more here.
3. Roth IRA
The next best option is to contribute to a Roth IRA. However, Roth IRAs have an income limitation so if your adjusted gross income is too high, you’re ineligible. You can read more here.
4. 529 plan
If you have children, grandkids, or other relatives and want to contribute to their college education, a 529 is the best way to do so. It works similarly to a Roth IRA — the investment income accrues tax-free and you’ll pay no tax when you use the funds for qualifying educational expenses. You can read more here.
5. After-tax 401K contributions
A little-known feature of some 401K plans is allowing participants to make additional after-tax contributions, up to a total of $57,000 per year. You receive no tax deduction but the benefit is that these additional contributions can be rolled into a Roth IRA when you leave your employer. This is like a super-charged, but delayed, back-door Roth IRA contribution. However, 401K plans often do not offer this option.
6. Pay off loans
It’s never a bad time to pay off your loans. You should probably start with the loan with the highest rate and work your way down. However, it sometimes makes good psychological sense to first pay off a loan with the smallest balance, just for the psychic satisfaction and sense of progress. Either strategy is a winner.
7. Invest in a taxable account
If the first 6 aren’t suitable for you, invest in a taxable account. Depending on your income and state of residence, a low-cost municipal bond fund combined with a stock index fund may make the most sense.
8. Give some money away
If you’re thinking about donating some money to charity, a “donor-advised fund” may be the best way to do so. With these, you donate the money to a fund you control and you can later designate the organizations to which the money is distributed. You get a tax deduction when you make initially the contributions to the fund. Fidelity, Vanguard and many other institutions offer these.
There are 5 “investments” I’d stay far away from:
1. Variable annuities. They’re too complex and the fees are high and hidden. As the old saying goes, “variable annuities are sold, not bought.” No one ever woke up one morning and said, “Today’s a good day to buy a variable annuity.” However, a single-premium income annuity is a different animal and may make good sense if you’re about to enter retirement.
2. Whole life insurance policies. They’re a confusing bundle of term life insurance and forced savings. Like many bundles, they combine something you want with something(s) you don’t need. Buy the term life insurance you need and save your money in one of the better ways I mentioned above.
3. Bitcoin and anything else that sounds like it. That usually leads to the intersection of heartache and regret.
4. Your brother-in-law’s latest no-lose investment scheme. Another path to heartache and regret.
5. Lottery tickets and sports betting schemes. Save these for your entertainment budget; but if you must gamble, go to the casino where the odds are usually better and the drinks are usually free.