Financial Independence

  1. 401 (k) up to employer match
  2. HSA
  3. IRA
  4. Max the rest of 401 (k)
  5. After Tax Accounts

401 (k) up to employer match

If your company offers a contribution by matching a certain amount or percentage that you put into your 401 (k) you want to make sure you are obtaining all of those extra funds.  (Note:  What your employer contributes does not count towards your max contribution for the year)

HSA – Health Savings Account

Max your Health Savings Account (if available) 2015 Max Contribution for Individual $3,350 and Family $6,650

An HSA is triple tax advantage, meaning:

  1. You are not taxed on the money you put in
  2. Earnings you make in the account are not taxed
  3. When you take money out for qualified expenses, you are not taxed.

If you take money out of this account for non-qualified expenses you are taxed at 10% which is much less than the average person’s typical tax rate

Fund your HSA by Payroll Deductions to avoid paying FICA taxes (Social Security and Medicare) which will save you 7.65% (Assuming you are an individual contributing the full amount this would save you just over $256 for 2015)

Links to Learn More

Learn from my mistakes

Year 1 (2014) didn’t contribute anything extra to my HSA

Year 2 (2015) contributed $1800 from my bank account, paying $137.70 more than I had to because that is the amount I paid in FICA taxes that would not have been taxed if I would have funded my HSA by payroll deduction

Mistakes I am currently making (2015), paying medical expenses with my HSA instead of paying out of pocket

IRA – Independent Retirement Account

As long as you have employment compensation you can contribute to an IRA.  For 2015 if you have your own job (employment compensation) and are age 49 and under then you can contribute $5,500 to your own IRA.  If you have employment compensation and are age 50 or older you can contribute $6,500 to your IRA in 2015.

Note:  If you are married and only one of you is employed, you cannot put money into the non-working spouse’s IRA.  (Each person has their own IRA, unlike a HSA which you can have one account for the family.)

What you need to know about Roth vs Traditional IRAs

Traditional IRAs are tax deferred (you are taxed when you take the money out), the funds you use to fund your traditional IRA will be completely deducted from your taxes if your AGI is below $61,000 for single or $98,000 for married filling joint returns (see phase out amounts).

Roth IRAs are taxed now, and you do not pay any taxes when you take the money out (see phase out amounts to see if you qualify).

Links to Learn More

Learn from my mistakes journey

Year 1 (2014) We almost missed contributing to our IRAs, but luckily we were able to contribute to our IRAs for 2014 in 2015 before we filed our taxes.

Note:  You can also enter the amount you are planning to contribute to the prior year’s IRA contribution and file your taxes before you actually put your money in.  April 15th is the last day to put money into your IRA for the previous year.  I would still recommend front loading (putting all your money in at the beginning of the year) your IRA if you are able.

Year 1 (2014) IRAs were 100% Roth because we took the advice of a Financial guy who works for Fidelity that came to our work and he basically said, “If you are young [and going to be working for a long time] just go with Roth, if you are close to retirement then it makes more sense to go with traditional.”

Year 2 (2015) I contributed $3,000 to my Roth IRA before I understood the quickest route to Financial Independence and more importantly this article Traditional IRA vs Roth IRA by the Mad Fientist.  The remaining $2,500 I will be opening up a Traditional IRA at Vanguard and investing in VTSAX.  I will also be guiding my husband to open a Traditional IRA at Vanguard for him to contribute his $5,500 into VTSAX for 2015.  Please note, the reason I am contributing to traditional now is because I plan on converting my traditional IRA to a Roth IRA when I am in a lower tax bracket, this is often referred to as a Roth Conversion Ladder.

Max the rest of 401 (k)

The Max contribution for 401 (k), 403 (b) and most 457 plans for 2015 is $18,000 for those of you who are age 49 and under.  If you are age 50 and older you can contribute an additional $6,000 for 2015.

After Tax Accounts

You pay taxes on these funds before you put them into the account and you pay taxes on the gains (any amount higher than the initial amount you put in).  You can take out funds from these accounts at any age without penalty.

How much you will be taxed on the gains depends on how long you held the investment for.

Short-term capital gains are investments held for a year or less before being sold and are taxed at your normal tax rate.

Long-term capital gains are investments held for more than one year taxed at a lower rate.  Currently the tax rate is 0% for the 10%–15% brackets, 15% for the 25%–35% brackets, and 20% for the 39.6% bracket.