One of our goals this year is to save and invest at least $50,000 in our various tax advantaged accounts. 2014 is just about over and I’m happy to report that we hit this one out of the park. We saved $56,800 in our tax advantaged accounts this year! Here are the details.
- Mrs. RB40 401k: $17,500.
- My solo 401k: $21,500. The i401k account enables me to save the extra $4,000. This is the employer contribution portion.
- RB40 Jr’s 529: $6,800
- Two Roth IRA: $11,000
Saving over $50,000 is a huge accomplishment and the tax saving makes it even sweeter. I know not every household can save this much money, but it’s a great goal to shoot for. How did we do it? Here are the keys to saving $50,000 in our tax advantaged accounts.
Married with children
This is much easier if you are married. In 2014, you can contribute $17,500 in your 401k account and $5,500 in your Roth IRA. That’s already $23,000. With two people in the team, you can max out these two accounts and save $46,000. (In 2015, the 401k contribution limit will rise to $18,000 so it will be even easier to reach $50,000.)
If you have children or plan to have them someday, then you can save the last $4,000 in a 529 and/or Coverdell account. College will be ridiculously expensive in 18 years so you really have to start saving now. That will get you to $50,000.
Also, if you’re 50 or older, you can use the catch-up contribution. The amount is $5,500 for the 401k in 2014. The Roth IRA catch-up contribution is $1,000.
What if you’re single and/or don’t plan to have children? If you are self employed and are making pretty good money, then you can contribute extra to the i401k as the employer. The business owner can contribute up to 25% of their self-employment income (20% if you are a Sole Proprietor.*) The total contribution can be a maximum of $52,000 per year in 2014. That’s $17,500 from your 401k limit and $34,500 from the employer contribution. So if you’re self employed and make over $138,000 per year, then it’s possible to put away $50,000 per year in your solo 401k.
Anyway, if you are married with kids, are over 50, and are self employed, then the logistic is pretty easy. If you’re a 25 year old single employee who doesn’t want kids, then it’s going to more difficult to save more in your tax advantaged accounts. You can always save more in your after tax account in that case.
*Check with your tax accountant to make sure.
Make at least $100,000 per year
Of course, you have to make pretty good money to save $50,000 per year. I think you need to make at least $100,000 per year to have a chance. Let’s make some very rough estimates assuming a household makes $100,000 of income. Even with saving $50k in tax advantaged accounts, they will have to pay tax. Their marginal tax rate will be 15% and they will probably pay about $7,000 to Uncle Sam. Let’s assume another $3,000 to local taxes. That will leave them with about $40,000. That’s only about $3,300 per month to spend. That’s not a lot of money to work with if you have a mortgage, car payment, and kids.
Set up auto deduction
The best thing about the 401k is that the deductions can be automated. You just figure out how much you need to deduct from each paycheck and then set it up at the beginning of the year. You can do the same with the Roth IRA and 529 as well. After you set up these auto deductions, then you’re safe to spend the rest of your take home income.
Keep track of your expenses
Yes, you can spend the rest of the take home, but you also need to keep track of your expenses. Let’s continue with our example family above. They can spend $3,300 per month, but inflation will decrease their buying power. A box of butter costs $5, a gallon of orange juice costs $4, and a dozen eggs $3. Last year, these items didn’t cost this much. Everything is getting more expensive every day. Lifestyle inflation is also tough to avoid. I didn’t have to pay for a monthly data plan 5 years ago. Now I’m paying $25 per month at Republic Wireless. Sure, it’s cheaper than other carriers, but I didn’t have that cost 5 years ago.
When you keep track of your expense, you will get an early warning if your monthly cost of living is trending up. You either need to make more money or cut back a bit. I update my trusty old spreadsheet once a month and use Personal Capital to make quick checks throughout the month.
Bonus: after-tax contribution in 401k
I don’t know much about these “after-tax” 401k accounts. There isn’t a lot of information on the internet and I don’t think my old company offers this option. Some companies allow extra after-tax contribution in their 401k. These are not Roth 401k accounts. You will still have to pay tax on the earnings, but the limit is much higher than the normal. It’s $52,000 for 2014.
You can roll it over to a Roth IRA when you leave your job. This is a new law and it’s very nice for people with money in their after-tax 401k. When you roll it over to the Roth IRA, then you won’t have to pay tax on the earnings. That’s free money! You might want to call your retirement plan representative if you’re interested. This after-tax 401k sounds pretty rare.
- HSA – You can save in HSA. That’s a nice shelter since you’re bound to use that money down the line.
- 529 for yourself – If you plan to go back to school someday, saving in a 529 for yourself is a great option.
- 457 plan – You can save another $17.5k in a 457 account. This is available to some government employees. I have never heard of this account.
So that’s the logistic on how to save $50,000 per year in your tax advantaged accounts. It could be easy or hard depending on your situation. I think it’s a nice goal to shoot for. If you save $50,000 for 20 years, that’s a cool million dollars right there even without any growth. At 7% growth, you’d have over two million dollars. That’s a nice cushion for your retirement.
How much are you saving in your tax advantaged accounts? Do you think it’s a good idea to put so much away in these retirement accounts?
Next time, I’ll go over what we plan to do with these tax advantaged accounts after we retire.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.