People face countless choices big and small over the course of their lifetimes, and as adults, many of these choices revolve around money. High-earners may enjoy more financial flexibility than others, but they must also be thoughtful about how they allocate their resources to maintain financial stability throughout their lives and into retirement.
This is especially true when it comes to the many workplace financial benefits available today. Even with a high salary, deciding where to put your money can be a tricky business. Having a plan for allocating income across different benefits at work — like 401(k)s, HSAs and stock purchase plans — can make a big difference in preserving and growing your nest egg.
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Where to start: the HSA
Assuming you have a good handle on the basics — you’ve got an emergency fund, your credit cards are under control, you have disability and life insurance to protect and replace future income, and you’re saving enough in your 401(k) to get the full employer match — you can prioritize your other workplace benefits. While everyone’s situation is different and these are not hard-and-fast rules, here’s some guidance on how to get started:
If your company’s health insurance offering is considered a high deductible health plan, you can enroll in and max out a Health Savings Account (HSA).* HSA contribution limits can increase from year to year and for 2019 are set at $3,500 for a single person under 55 and $7,000 for a family; individuals who are 55 or older can make an additional $1,000 catch-up contribution. Plus, most HSAs let you put contributions into a menu of investments, similar to how you invest in your 401(k), rather than just leave them as a cash balance.
The reason to start here is that HSAs are triple-tax-advantaged saving and investing vehicles. Contributions are federally (and, in most cases, state) tax deductible — regardless of your filing status — and have no income phase-out limits. This means the higher your tax bracket, the more you can benefit. Money in an HSA grows tax-sheltered, and withdrawals for qualified medical expenses like doctor visits, prescription medications, eye exams and dental care aren’t taxed either, even if you wait until you are retired to tap into your HSA. Paying for health care is an important consideration in retirement, and HSAs are an excellent way to plan, save and invest for medical expenses in your golden years. While you may need to use some of your HSA to pay medical expenses while you are working, keeping the balance invested until you retire can help you to derive potentially greater benefits from your account.
Next: Do more with your 401(k) and explore the Roth option
If you’re not maxing out your 401(k), it would be a good idea to do so. The 2019 limit is $19,000, plus another $6,000 in catch-up contributions for participants aged 50+. It’s also worth thinking critically about the tax distinctions and advantages of Roth versus traditional 401(k) plans.
Roth 401(k)s are funded with post-tax dollars but then allow you to take tax-free distributions in retirement. For this reason, they are generally considered more appropriate if you think you’ll be in a higher tax bracket in retirement than you are now.
Unlike Roth IRAs, you are eligible to contribute to a Roth 401(k) regardless of your income and filing status if the option is available through your employer.
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Additional steps to consider: Stock purchase plans and after-tax 401(k) contributions
If your company has an employee stock purchase plan (ESPP), you may want to consider joining it as a next step (your plan, for example, might let you contribute up to 10% of your salary to it, with a cap of $25,000). Stock purchase plans typically let employees purchase company stock at a discount, often of 10% or 15%. For example, if your company’s stock is valued at $100 per share, you might pay only $85 per share through the stock purchase plan. One strategy is to sell all or part of your shares immediately after they are deposited in your brokerage account (many plans purchase stocks twice a year and deposit them into your account), keeping in mind that the gain (value of the discount) will be taxed as ordinary income. You can then direct the proceeds into your other investment accounts for diversification, or use the cash for other needs.
Another strategy is to hold the shares at least until they have become qualified. When you sell after the qualifying holding period (one year and a day from purchase and two years from the grant/subscription date), there is a component of ordinary income and long-term capital gain that will be recognized. The amount of each depends on whether you are selling the stock for more or less than the purchase price. But remember that holding the stock over this time period also exposes you to more risk since the price of the shares in your account could drop, potentially below the discounted price you paid.
The timing for selling is a matter of personal preference and circumstance, based on your view of the company stock and your individual financial goals. I strongly recommend consulting with your tax adviser regarding your situation and the specific tax and the reporting implications of an ESPP sale.
Beyond that, you might want to circle back to your 401(k) one more time. Did you know that some traditional 401(k)s allow you to contribute after-tax dollars above and beyond the limit for pre-tax dollars? If your plan allows it, consider contributing more using after-tax dollars. Later, you can convert that after-tax portion to a Roth 401(k) or Roth IRA and future earnings and withdrawals can be tax-free.
Make more informed choices with professional advice
Guidance like the above can help point you in a good direction, but there really is no one-size-fits-all path. Speaking with a financial professional can help you prioritize the allocation of your resources in a way that balances both current and future needs.
In addition to tax advisers, wealth planners and other financial professionals you might engage on your own, you may also have access to advice at work. Many employers offer investment advice as part of the company 401(k) plan and/or more holistic financial wellness resources. When it comes to decisions as important as the ones you make about your finances, you owe it to yourself to make them with as much clarity and wisdom as possible.
Catherine Golladay is chief operating officer of Schwab Retirement Plan Services.
*Some exceptions apply. For instance, if you are 65 or older and enrolled in Medicare, you cannot contribute to an HSA.
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