Save More Money
Anytime is a good time to save more money. Here’s my updated list of the best places to save and 6 “investments” from which I’d stay far away.
Best Places to Save
1. HSA
Nothing beats 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’s a trifecta of tax-deductible contributions, tax-free growth, and tax-free distributions. And, some employers even contribute to the account to incent you to do it. Lastly, if you have other savings, don’t use the funds when you have medical expenses — let them keep growing tax-free. You can read more here.
2. ESPP
If you work for a public company that offers an employee stock purchase plan, take full advantage by maximizing the contributions to it. If you auto-sell your shares each period, in most plans, you’ll lock in a minimum gain of 17+%. That’s hard to beat. You can read more here.
Better Places to Save
3. Your employer’s 401K
Not all 401K plans are great in terms of investment options and fees but you can contribute through payroll deductions which is a big advantage. Also, many employers offer a match and that’s free money you shouldn’t turn away.
If you’re self-employed, contribute to a SEP-IRA instead.
4. Roth IRA
It’s always sensible to fund a Roth IRA. You can still contribute even if you have a 401K at work. However, Roth IRAs have an income limitation so if your adjusted gross income is too high, you’re ineligible. You can read more here.
5. Back-door Roth IRA contribution
This one’s a bit complicated so search the google tubes for the details but briefly, for those whose income is too high to be eligible to contribute to a Roth IRA, you can make non-deductible contributions to a traditional IRA and then immediately convert the funds to a Roth without owing tax. It doesn’t work if you have an existing traditional IRA balance for reasons I won’t go into here. This one is in Congress’ cross-hairs so it may not survive much longer.
6. 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 $61,000 per year. You receive no tax deduction but these additional contributions can be rolled into a Roth IRA when you leave your employer.
If you’ve maxed out contributions to your 401K and you’re not eligible for a Roth IRA, this is like a super-charged, back-door Roth IRA contribution. However, 401K plans often do not offer this option. This one is also in Congress’ cross-hairs so its days may also be numbered.
7. 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.
8. US Treasury Series I Inflation Bonds
The “I” stands for inflation and these are inflation bonds marketed directly to individual investors by the US Treasury. Simply put, the interest rate you earn fluctuates based on the current rate of inflation as determined by the CPI (consumer price index). These bonds have a base rate and then an adjustable rate that re-sets every six months to the then current rate of inflation. The interest income is exempt from state income taxes and can be deferred into the future on your federal taxes. With inflation high now, they’re a good deal. However, even if inflation dampens, they’re usually a better deal than regular US Treasury bonds. You can read more here.
9. MYGAs
A Multi-Year Guaranteed Annuity is the insurance industry’s version of a bank CD. You hand over your money to an insurance company for a specified term (usually 3 years or more) and they return your money, plus the interest at the end of the term, or roll it over into a new MYGA. Generally, it’s a better deal than a bank CD (though not FDIC guaranteed) and has slightly better tax treatment. You can read more here.
Good Places to Save
10. 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.
11. Invest in a taxable account
If the first 10 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 be most tax- and cost-effective.
12. Give some money away
OK, this isn’t saving but if you’re thinking about donating some money to charity, “donor-advised funds” 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 initially make the contributions to the fund. And, you can also donate appreciated securities. You can read more here.
Bad Places to Save
Avoid these 6 “investments:”
1. Variable annuities
They’re complex, expensive, and offer little benefit. No one ever woke up one morning and said, “Today’s a good day to buy a variable annuity.” As the old saying goes, “variable annuities are sold, not bought.” 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 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 crypto-sounding
It’s never a good idea to invest in something you don’t understand as it usually leads to the intersection of heartache and regret.
4. Metals
There’s also no clear intuition for why these metals should appreciate over time beyond their industrial value, especially compared to other investments such as stocks, bonds, and commercial real estate. Instead of receiving interest or dividends, you pay for storage, insurance, and shipping, and incur high transaction costs.
5. Your brother-in-law’s latest no-lose investment scheme
You may end up on another road to heartache and regret.
6. Lottery tickets and sports betting
Save these for your entertainment budget; but if you must gamble, go to the casino where the odds are better and the drinks are free.
There’s no time like the present to make a commitment to save more.