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How to Save $50,000 Per Year in Your Tax Advantaged Accounts

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How to save $50,000 per yearOne 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.

Self Employment

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.

Readers’s input

  • 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.

Invest more

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.

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{ 35 comments… add one }

  • Petrish December 15, 2014, 2:22 am

    Auto deduction is the way I deposit money in my savings and retirement fund. It is the best thing that I have ever done. For people who find it hard to pay themselves first this is the way to go. Congrats on reaching your savings goal this year!

    • retirebyforty December 15, 2014, 10:08 am

      I’m really glad I started auto deduction with my first job. It’s much easier to save when you don’t see the money in your bank account. Thanks!

  • EaWoods December 15, 2014, 4:08 am

    I believe you are on the right track. Saving with automatic deductions is the best way to build wealth for retirement. I have been making deduction with my employer for over 23 years. My only regret is that I didn’t make the full contribution earlier in my career. I appreciate the great article.

  • Caro December 15, 2014, 6:43 am

    I love how disciplined you are in saving. My husband and I were able to max out our 401K while both of us were working. I recently took off a couple of years to stay home with the kids. We have made it a priority to max out his 401K to the detriment of our savings account. But we know that I will be going back to work and we will then be back on track. My husband’s company just started offering a ROTH 401K. For now we switched entirely to that. I like the security of knowing that what I see in our account is really ours. However, when I return to work and if we are pushed into a higher tax bracket we will probably switch back to a traditional 401K. For 2014 we did max out both of our ROTH IRA’s but again that was truly funded from prior savings since our current cash flow does not support it. These are lean and painful times for us. I wish I could figure out a side hustle.

    • retirebyforty December 15, 2014, 10:11 am

      Great idea going with the Roth 401k while your income is lower. We did that for a year, but now our income is higher again. We’ll convert some of our 401k to Roth IRA when we have some down years.
      Keep your eyes open for side hustle. Read and see if you can find something that’s a good fit. It’s tough with kids, though. Things will be a lot smoother when you go back to work. Good luck!

  • nicoleandmaggie December 15, 2014, 7:22 am

    Great post!

    • nicoleandmaggie December 15, 2014, 6:33 pm

      Btw, if you work for the government, you can often add 17.5K to a 457 plan in addition to the 403b. So this year at work I’ve got the employer contribution,and 17.5K to the 403b, and 17.5K to the 457. (And next year those limits increase!)

      • retirebyforty December 15, 2014, 11:17 pm

        Thanks. I didn’t know about the 457 plan. That’s a nice benefit if you have access to it. That’s a lot of tax deferred saving.

  • Mom December 15, 2014, 7:25 am

    Don’t forget that you can have a 529 account for yourself – but it only really makes sense if you plan on going (back) to school someday or having kids someday.

    We’re planning on putting over 50k into our tax advantaged accounts next year – 18k each in our 403(b) plans + 11k Roths + 4400 into our new HSA. We’ll also be getting matches and adding some to Daughter Person’s 529 (still somewhat negligible), hoping to get close to or top 75k total between our contributions and employer contributions.

    • retirebyforty December 15, 2014, 10:12 am

      I don’t think I can go back to school. I don’t have the patience to sit in class anymore. Maybe I’ll just audit some classes.
      HSA is pretty awesome. I’ll add that to the main article. Wow, 75k is fantastic. Good luck next year!

  • Emily December 15, 2014, 9:22 am

    Congratulations! Way to beat an aggressive target!

  • Kurt @ Money Counselor December 15, 2014, 9:25 am

    A guy can really save, if he’s committed! 🙂

  • Tawcan December 15, 2014, 10:13 am

    Saving $50k per year is no small feat. That’s some very impressive numbers you’re sharing. I think it’s a great idea to maximize all tax advantaged accounts. It’s rather silly not to utilize these accounts when they’re available to you.

  • Vawt @ Early Retirement Ahead December 15, 2014, 12:03 pm

    I am impressed with that number. We are hoping to get near that in 2014 and for sure at least that much in 2015. Retirement Savings need to be prioritized and you are a good example of that.

  • Anon E. Mouse December 15, 2014, 1:13 pm

    We contribute ~1/3 of our pre-tax income to tax advantaged accounts. $17.5K each to our 401ks, our employer kicks in an additional $20K combined. The remainder of our tax advantaged savings (a bit over $100K/yr) is in a deferred compensation program.

    To be honest, the latter bit makes me nervous. Deferred compensation is not guaranteed; if our employer were to go belly-up (unlikely, but that’s what Enron employees thought), we would be at risk of losing that savings.

    But on the other hand, those dollars would be taxed at ~50% if not deferred, and that savings is just too significant to pass up. The advantage of deferred compensation is that the money can be withdrawn (and taxed, of course) before retirement age is reached. So while I view our 401k/IRA savings as “long term” and our after-tax savings as “short-term”, I view the deferred compensation as “medium-term”; something that can bridge us from early retirement until we can access other retirement funds.

    • retirebyforty December 15, 2014, 11:13 pm

      Oh wow, you are really putting it away. Great job!
      I don’t know much about deferred compensation. You can take it when you leave, right? Or do you have to wait until retirement?

  • Mr. Maroon December 15, 2014, 3:12 pm

    Tax-advantaged savings has always been frightening for me because I suspect Uncle Sam is too greedy not to get his share. Plus, if I’m retiring well before 59 1/2, I’m going to need more accessible retirement dollars. Right?

    Having read a few blog posts detailing the conversion tactics for 401(k)s, IRAs, and Roth IRAs, I’m going to get on board this year.

    In 2015, Mrs. Maroon and I will contribute to our endowment as follows: $18,000 each to 401(k), $5,500 each to Roth IRA (our adjusted gross income is too high to get the Traditional IRA deduction, so we figure we’ll let our money grow tax free instead), $2,400 into 529 CSP (we could do more here, but I’m not completely sold on the fear factor of future college tuition), and another $9,500 in a taxable account (we’ve got to have a little bit of money to get us to where we can make withdrawals from our tax-advantaged stash). That’s $58,900.

    Plus we’ll gain approximately $10,000 in equity on our mortgage, provided, of course, that our home doesn’t lose value.

    Our 2015 goal is to bump that up to a round $70,000 towards our endowment. With a little bit of careful frugality, we might even achieve $75,000.

    • retirebyforty December 15, 2014, 11:16 pm

      Good luck in 2015. That’s a lot of saving. You’ll have to pay tax when you take distribution so Uncle Sam will get his share in the future (401k.)

  • BE Pennypacker December 15, 2014, 6:44 pm

    Nice blog! I love the concept of retiring early!

    My wife and I max-out our Roth IRA accounts, but only contribute enough to get the employer matches on our 401k’s. The rest of our long-term investing dollars go into taxable accounts. There are three reasons for this:
    1) There no required minimum distributions on taxable accounts
    2) We only have to pay the 15% capital gains tax when we cash out our investments
    3) More investment choices

    • retirebyforty December 15, 2014, 11:19 pm

      That’s a good approach too. We’ll probably cut back on our tax deferred accounts when we have less income.

  • SJ December 16, 2014, 5:03 am

    Accessibility to retirement accounts still seems bizarre to me. When I was working a bad job with no 401k my only option was to save the 3k or so allowed in a IRA then (so I plowed more saving s into taxable accounts). A better job gave me access to a 401k and the much higher limit, and now that I’m self employed and making pretty good money I can put away 50k+ into a solo 401k. Just seems strange the worse the job you have the less accessibility you have to retirement accounts (i.e., why not just allow people without a 401k or self-employment a higher limit in their IRAs?).

    • retirebyforty December 16, 2014, 10:11 pm

      Well, if you don’t make much money, you don’t really need tax shelter. It’s more useful when you make more money. The law is written by rich people, right?

  • Pennypincher December 16, 2014, 5:13 am

    PS- I tried going back to school a few times, I couldn’t sit there in class anymore- UGH! I did my time years ago. Done with school. Finished. Case closed. End of story.

  • The Roamer December 16, 2014, 11:08 am

    We are maxing out 401k this year. Wohoo.

    Next year I think we will try to max out IRAs too.

    I really need to figure out the HSA.. Maybe well see what happens next year.

  • Dzogen December 16, 2014, 1:06 pm

    Legitimate question here.

    If your stated goal is to retire by 40, why are you investing in accounts that you can’t withdraw from until 59 1/2?

    • retirebyforty December 16, 2014, 10:12 pm

      You can read about that next time. Basically, we like the tax write offs. There are a few ways to withdraw your money without having to pay the 10% penalty.

  • Xeno December 16, 2014, 6:23 pm

    Hi RB40,

    I would like to know how I can stash more away:

    I’ve already maxed my employer 401k and make over what I can put into a Roth IRA. I’ve heard of a backdoor Roth that can be done do you know if this is true? Also I was wondering since I don’t own my own business, can I start one up on the side and do a i4o1k on top of my employer 401k? If not do you have any other suggestions other than a taxable account? Thanks!

    • retirebyforty December 16, 2014, 10:16 pm

      I haven’t had personal experience with the backdoor Roth. You probably will need to talk to your tax accountant. I read a few articles about this maneuver. I’ll add it to the main article.
      Have you asked your employer about the after-tax 401k? Do a little research on the internet and then call them.

  • kevin December 21, 2014, 10:37 am

    If you make 100k annually, you still need to pay social security and medcare for the amount of 401k you save. So out of 100,000, there is almost another 7,000 social/medicare tax in addition to the tax you calculated. So even making 100k, it is very very difficult.

  • Amee February 9, 2015, 2:03 pm

    Hi, do you know anything about 403B? What is the max for contribution to that?

    Thanks.

  • Dr. P May 11, 2015, 8:55 am

    Just to help out a little with the questions:
    – 457b = deferred compensation plan; essentially this is the same as a 401k, and if your employer uses a separate vendor, is secured with SIPC coverage like most any investments are. (My wife and I each max these out – $18k/yr this year, so both of us getting $36k each or $72k put away, plus employer matching = around $100k/yr tax-deferred, which is a great help with state, federal and FICA taxes … as our taxes get nuttier every year!)
    – 403b = again, just like 401k and 457b. Same limits, and exactly like the 457b and 401k, can also be rolled over to IRA after you leave your employer, so you can self-manage. Like 401k and 457b, the 403b can also be set up as an after-tax/Roth-style account thanks to new laws. These are what some people are now colloquially calling “after-tax” 401k plans, but really they are simply Roth versions of the traditional accounts. It’s entirely up to the employer as to whether or not they are offered, however. Some do, some don’t; (it’s more paperwork for them).
    – Don’t confuse “after-tax” (formally called “nondeductible”) contributions with the after-tax or Roth plans. Before the Roth accounts (so-named by Sen. William Roth in the late 90s who created the legislation), the traditional IRA and 401k provisions set up in the early 70s had income limits and employer-coverage restrictions, beyond which only nondeductible contributions could be made (and still can). They are still “tax-deferred” growth, however, while a Roth account is “tax-free” growth. That is, earnings from excess (nondeductible) contributions made to a traditional IRA or 401k will STILL be taxed when withdrawn in retirement. So, the only benefit is tax-deferred growth of after-tax dollars. Roth contributions and earnings are entirely tax-free (much better).
    – You may contribute to BOTH a 457b and EITHER a 401k or a 403b, but not all three. So, if they are offered, you can double-up the $18k/yr limit. You can do this in any combination of Roth or traditional. For example, when my wife and I made less, we contributed some to traditional with the ensuing tax-reductions, and some to the Roth.
    … finally, I agree with the allocation of more toward tax-deferred with higher-income and marginal tax brackets, with more going toward after-tax (Roth) when you have a lower income (as just noted above).

    I know it’s confusing, but that’s the price of having many options and freedom to choose – clearly preferential, in my estimation though. (As for how I know all this so easily, I serve as my university’s representative to the investment advisory committee that oversees the vendors for retirement plans available to the nearly 20-universities in our state system … with about $4.5 billion invested presently. So, I kind of “have” to keep up with all this stuff.)

    Hope that helps
    – Dr. P

  • Megan May 28, 2015, 10:07 am

    I work at a state university and I have a 457(b). It’s like a 401(k) in the investment options you have to choose from, but unlike the 401 you have open access to it once you leave your current employer. There’s no age penalty. You just have to be no longer employed by the employer.

  • Bobby November 18, 2015, 1:21 pm

    Great post, thank you for sharing.

    A minor observation: you mention “529 for yourself” in the reader input section – Since 529 plans can be transferred back and forth in the family for as long as you like, they can be a great estate planning tool as well…. perhaps an idea about a new post 🙂

  • Stevie Wonders January 29, 2016, 9:29 am

    Just one of the seven companies I worked for allowed 401k after tax contributions. Although there was a theory about rolling this into a Roth IRA, six years ago there was no guidance from the IRS permitting this (bummer!), so I took it out after leaving. Intel does not permit after tax 401k. It would be an awesome backdoor Roth for those lucky enough to have it.

  • John Kane February 17, 2016, 10:48 am

    I am actually in a position where I can take advantage of the after tax 401k so I’m certainly going to take a look at this.

    Thanks for the heads up.

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