Beginning of the Year Financial Tasks

It's time to pay attention to your finances. It's January, right? And the amazing thing, when we look at our traffic for the website, it's always really high. January to April, and then you guys go on summer vacation just like we do. And the fall's kind of chill, and then coming in December, it kind of picks back up again. And that's just the way personal finance is, right? We think about it at the beginning of the year. Well, it's the beginning of the year. It's time to think about it, right? If you're not experiencing the success you would like, you need to make some changes in your life. And you can do that. You can save a little bit more money, you can earn a little bit more money, you can invest a little bit smarter, you can take care of those important financial tasks that maybe you've been putting off, like buying disability insurance from one of our recommended agents. You can go to whitecoinvestor.com insurance for that. Or maybe you need to get a will in place or maybe you need to do some more extensive estate planning or give a thought or two to your asset protection plan. Wherever you're at, please take this as motivation to help you do that. I wanted to talk a little bit about front loading retirement accounts, right? Investing in tax protected accounts is a good thing. Not only do those accounts get more asset protection in every state, some states even protect your IRAs completely, but in some states protect HSAs and 529s as well. But they grow faster, right? You put the money in these accounts and they don't get taxed as they grow, even if you're buying and selling within them. And so you want to invest as much as you can inside these tax protected and retirement accounts rather than outside of them. So as much as you can, try to frontload your contributions to those things. So for the most part, you're trying to use your earnings in the early part of the year to go into retirement accounts and HSAs, 529s, whatever. And later in the year is when the money goes into your taxable accounts, that gives you a few more months of that extra tax protection. And so the first thing that we fund every year is our hsa, right? HSA is triple tax free. And so every year for like the last, what, 14, 15 years, we have put the maximum contribution into an HSA basically the first week of January, and we have invested it in equities the entire time. And obviously, in fact, US equities basically just put it all into total stock Market fund, just for simplicity. And obviously over the last 15 years that has done very well. I think our HSA is pushing a quarter million dollars and a good chunk of that is because we front loaded it every year. And that's what happens when you start frontloading these sorts of accounts. We also fund very early. Our backdoor Roth IRAs. You can do one of these for yourself, one of these for your spouse. It takes a few more days than the HSA. The HSA you can usually dump in January 2nd or whatever. What often happens with the backdoor Roth is the money's gotta sit there for a few days or a week or as much as three weeks. I've heard before, before they let you do a Roth conversion on it. Two step process, contribution to a traditional ira, then a conversion to a Roth ira. Yes. If you got some extra money in there from the growth in between those two steps, you ought to convert that as well. And you'll owe taxes on the $16 or whatever earned in between contribution and conversion. But otherwise it's generally a tax free conversion because you didn't get a tax deduction for making the contribution to the traditional IRA because you make too much and you have a plan at work you can do more, though that's not the only things you can put in in January. Many of us have control over our individual 401s, and the IRS does not care when you make the money as long as you make it during that year. You don't have to earn it before you can put it into the 401. Now you have to have some money put into the 401, but you don't have to earn it. You have to earn it by the end of the year to justify the contribution. But if you know you're going to make enough money to max the thing out, you can max the thing out right away. What I end up doing in my physician partnership where I make my employee contribution is I send them a check in January. For last year it was $23,000. I think this year is 23,500. I send them a check and I say put this in my 401. Now I wait until like April of the next year to make the profit sharing or employer contribution to that 401, because I just don't know how much I'm going to make and how much they let me contribute to it. I don't practice medicine enough to be able to max that account out. So I got to wait a while to put in the employer contribution. But you know, What Katie and I do with our first paychecks from WCI of the year, we max out our WCI 401Ks. We happen to do mega backdoor Roth contributions in that, but we do it early in the year. And we've always done this in early in the year, as early in the year as we could. Now in the beginning we didn't have enough money to like max everything out in January, right? We couldn't do it. But every year we tried to move it up, right? Maybe the first year you come out of training, you can't even, don't even have any money to do your backdoor Roth IRAs. And you end up doing it like April of the next year. Well then you move it up to January or up to December the year after that, and maybe October the year after that. And eventually you get to the point where you're doing it early in the year. January, February, March, et cetera, you know, and you can gradually move everything up, right? Maybe it takes you four or five months to max out that 401k. That's okay. Better to get it in there in the first four months of the year than spread it out over all 12 months of the year. You get a little bit of extra tax protected growth from front loading your accounts as much as you can. Now this is obviously the maximizer approach, right? And satisficer works for most of us in all things we do. But if you're trying to get the maximum benefits out of those accounts, front load them, you can do it with your HSA, you can do it with 529s, you can do it with your 401ks. A lot of times your cash balance plans won't let you do it like mine won't let me front load it at all. We have to to spread our contributions out throughout the year, and that's okay. Whatever they want to make me do is okay. But as a general rule, your savings early in the year ought to go toward the tax protected accounts and the savings toward the end of the year, if any, can go toward your taxable accounts. Or maybe that's when you spend more money or give more money or whatever, right? But that front loading effect does have an effect on how quickly your accounts can grow.

The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.