As we head into 2023, I like to help clients identify easy ways to start the year off right by saving more. Perhaps you…
Received a bonus or a raise and need guidance on how to save or invest the additional cash;
Have a tax refund coming to you; or
Want to consider ways to save more this year.
Whatever the case, the beginning of the year is a great time to set your intentions and establish good habits to ensure you save for your financial goals!
Options for Your Savings Plan
To help you spot ways to save more this year, here's a list of seven savings strategies to consider when you have surplus cash or savings on hand.
1. Emergency Fund
If you have a spouse or partner and you're both working, you may want to set aside three months of livings expenses (it doesn't need to match your income) in case of emergency.
If you're single or the sole income earner, you may want to set aside six months of living expenses.
If you're a high-income earner or entrepreneur, you may want to set aside as much as 18 months of living expenses to take advantage of job mobility and business opportunities.
2. Healthcare Savings
Do you have a Flexible Spending Account (FSA)? If so, consider making a pre-tax/tax-deductible contribution of $3,050, which can be used on medical, dental, and vision care. Be sure to spend any funds that can't be carried over by the end of year, as you may lose any remaining funds. Lifetime supply of Band-Aids, anyone? ;-)
If you have a child or children in daycare, camps, after-school care of receiving care from a nanny, check to see if your employer has a dependent care FSA plan. If so, you can deduct up to $5,000 a year pre-tax from your paycheck.
Do you have a Health Savings Account (HSA)? If so, consider making a pre-tax/tax-deductible contribution of up to $3,850 ($7,750 for a family) and an additional $1,000 if you're age 55 or older. The HSA is the most tax-preferred vehicle available.
3. Retirement Savings
Make sure you contribute enough to maximize the amount of any match offered by the employer.
You can contribute up to $22,500 annually ($30,000 if age 50 or over) if your employer plan is a 401(k), 403(b) or 457.
You can contribute up to $15,500 annually ($19,000 if age 50 or over) if your business or employer has a SIMPLE 401(k) or SIMPLE IRA plan.
If you have made the maximum salary deferral contribution and want to contribute more, consider if a Mega Backdoor Roth contribution is applicable.
If permitted, make a designated Roth contribution and pay taxes now at the lower rates. Contribute up to $6,500 ($7,500 if age 50 or over) to a Roth IRA.
Note: Eligibility is phased out between $138,000 - $153,000 MAGI (single) and $218,000 - $228,000 MAGI (married).
4. Employer-Provided & Business Owner Savings
Does your employer offer any employee equity compensation plans? If so, consider participating and review your selling strategy in advance.
Are you a business owner? If so, consider the following: You can contribute up to $66,000 a year in a defined contribution plan.
You can save more than the above amounts by opening and contributing to a pension plan. Contribution amounts will vary depending on several factors, such as the ages of the employees.
Are you a business owner and do you have minor children? If so, consider the following:
Offering your children paid positions within the business can allow them to save in their name (and to be taxed at their income bracket). A Roth IRA may be an appealing account to fund.
Single member LLCs, sole proprietorships, and partnerships where the only owners are the parents don't have to pay FICA taxes on the earnings of a minor child.
5. Savings to Help Future Generations
Are you or your dependents planning to attend college? If so, consider using a 529 plan to save for college:
You can use your annual exclusion amount to contribute up to $17,000 per year to a beneficiary's 529 account, gift tax-free.
Alternatively, you can make a lump sum contribution of up to $85,000 to a beneficiary's 529 account, and elect to treat it as if it were made evenly over a 5-year period, gift tax-free.
You may be eligible for a state income tax deduction or credit if you contribute to a plan sponsored by your state.
Are you interested in funding future generations? If so, consider the following:
UTMA/UGMA accounts could be used to save on behalf of minor children (or grandchildren). Be mindful of "Kiddie Tax" rules.
Dynasty trusts could be used to provide funds for many future generations. Each state has specific rules regarding the vesting of interests and maximum duration of trusts.
6. Tax-Deferred Insurance Options
Do you have (or would you consider) an annuity? If so, consider the following:
If you have maxed out your savings in tax-deferred accounts, this option may be attractive as it provides tax deferral on the gains. Depending on the contract, some annuities offer very few guarantees, resulting in low-cost options.
Do you need to increase your life insurance coverage?
If so, consider the benefits of buying a cash value life insurance policy, which can provide both life insurance and tax deferral on the gains.
7. Other Investment Savings
Are you looking to invest in the markets and are you not overly concerned about saving (or able to save) in tax-deferred accounts? If so, consider a taxable brokerage account:
Long-term gains are taxed at preferential rates upon the sale (no tax at distribution from the account). Qualified dividends are also taxed at preferential rates.
Some investments (tax-managed funds, zero-dividend stock funds, municipal bond funds, ETFs) can further mitigate any tax liability.
Are you charitably inclined? If so, consider utilizing a Donor Advised Fund.
Do you have any debts (especially credit card debt)? If so, consider paying down high-interest debt instead of saving more.
Making Sense of the Various Savings Options
Identifying available savings opportunities and prioritizing across accounts can be complex and overwhelming. For example, do you know whether you are eligible for and taking full advantage of pre-tax health care savings accounts, such as HSAs and FSAs? Are you optimizing your retirement savings, choosing between traditional and Roth options, obtaining the total amount of any employer match, and maximizing your contributions?