A multitude of novel approaches have been proposed by advocates of the “financial independence, retire early” (or “FIRE”) movement. The FIRE group has some great ideas, but you need to be on track to retire at age 40 to benefit from them.
If you want to boost your retirement funds, here are three tried-and-true FIRE tactics.
1. Your HSA Has the Potential to Become a Powerful Retirement Account
A health savings account (HSA) is one of the most potent retirement accounts, and you can open one if your health insurance plan supports them.
To help those with high-deductible health plans offset the costs of healthcare expenses, the HSA was established. Your HSA contributions are not taxed, nor are any withdrawals you make to cover qualified medical expenses.
But many who follow the FIRE philosophy instead save and invest for their golden years. Meanwhile, they use other cash to cover necessary medical care and save relevant receipts. To make a withdrawal from their HSA, individuals provide the relevant receipts.
The health savings account also has a favorable tax treatment. You won’t have to pay payroll taxes on any money you contribute straight from your paycheck.
Beginning penalty-free withdrawals at age 65 is possible if you do not have significant medical costs. Suppose the funds are not used for necessary living expenditures. (I’m not sure how this last sentence fits in.)
2. Pay no Taxes on Your Capital Gains
You undoubtedly already know that a lower tax rate applies to long-term capital gains. Generally, investors will be subject to a 15% tax on any profits made on top of their initial investment. The FIRE community, however, takes full advantage of the fact that there is a tax bracket of 0% on capital gains.
Suppose your taxable income is less than $41,675 (single filers) or $83,350 (married filing jointly). In that case, you qualify for the 0% capital gains tax bracket. The federal government does not tax capital gains if your income falls below the specified thresholds.
To take advantage of the 0% capital gains tax band, you can leave your investment alone and reap the benefits afterward. You can realize your capital gains from selling stocks (or another asset) and promptly reinvest in them. A taxable event has occurred, but there will be no tax due. The final effect is a higher cost basis for your investment, guaranteeing that your profits will never be subject to taxation. The process is known as “tax-gain harvesting.”
Tax-gain harvesting is most advantageous in low-income years. Most people do this before they start getting Social Security or have to start withdrawing money from their IRAs.
3. Unlock the Roth IRA Mega-Backdoor
A Roth IRA is an excellent retirement savings option for those with substantial income. But you may want to investigate if you can access the mega-backdoor Roth IRA, which might permit you to contribute tens of thousands more to your account annually.
You can access the mega-backdoor Roth through your employer’s 401(k) account. You can access this tactic if your plan allows for after-tax contributions outside the Roth IRA and withdrawals while you are still actively employed.
How it Works
A 401(k) plan allows for a maximum contribution amount. First, the amount of money you may save by avoiding taxes is limited. That’s $27,000 if you’re age 50 or older in 2022 or $20,500 for 2022.
Secondly, there is a cap on how much money may be put into the plan under your name. That includes your pretax contributions, your employer’s matching contributions, and any additional posttax contributions that aren’t Roth. For 2022, the maximum is $61,000 (or $67,500 if you’re age 50 or older).
Total contributions would be $26,000 if you contributed the maximum allowable amount to tax-deferred accounts and your employer also contributed the maximum allowable amount ($5,500). That allows room for an additional $35,000 in after-tax contributions.
If your plan permits, you may transfer the $35,000 to a Roth IRA or other approved Roth investment vehicle. You can use the mega-backdoor Roth to put more money into tax-deferred accounts.
You can increase your retirement savings and decrease your tax liability by adopting some of the same practices as the FIRE group. You should respect the innovative strategies put out by those who have chosen the FIRE path, even if you aim to work until the traditional retirement age.
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Bio:
Mark, a lifelong Tulsan graduated from Westminster College, Fulton, Missouri with a Bachelor of Arts in Accounting. Mark served in the United States Army as a Captain in the 486th Civil Affairs BN. Broken Arrow, Oklahoma and retired in 1996. Mark is married to his high school sweetheart Jenny and has four beautiful children. Mark’s passion for his work, which includes over 20 years in the Financial Industry started as an Oklahoma State Bank Examiner. Mark examined banks throughout Oklahoma gaining a vast knowledge and experience on bank investments, small business and family investments. Mark’s experiences include being formally trained by UBS Wealth Management, a global investment firm where he served as a Financial Consultant specializing in Wealth Management for individuals & families. Mark is a licensed Series 24 and 28 General Securities Principal and an Introducing Broker Dealer Financial Operations Principal. Additionally, Mark is a Series 7 and 66 stockbroker and Investment Advisor focusing on market driven investments for individuals, businesses and their families.
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