Bruce Lorenz outlines where to direct new savings: first capture your 401(k) employer match (guaranteed 100% return), then max an HSA for its triple tax advantage, then an IRA, then a taxable brokerage account. The order can shift if you have variable income, a big purchase coming, or an unusual tax situation.
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You may be saving a lot in a 401k, an IRA, an HSA or maybe even a brokerage and still leaving money on the table. Hi, I'm Bruce Lorenz, certified financial planner and advisor here at Bolda. In this video we're going to talk about the contribution waterfall. Where your next dollar should go and why and stay to the end. Because sometimes the most misunderstood account may be the best. So let's start at the beginning. We want to first determine our goals. We may have some short term goals. We may need to establish an emergency fund. Or we may be looking at some large purchases in the next few years or long term goals. Retirement. Trying to make sure we keep the most money and the most tax efficient way we can to better ourselves later in life. Our goal isn't to use every account, it's to use the right accounts in the right order. So number one, our 401k or 403b up to the employer match. Your 401k is your retirement account in a for profit company. The 403B is a similar account in a not for profit entity. In other words, most retirement accounts, the employer will match your contributions up to a certain amount. That's 100% return, right? A guaranteed income. Free money. You want to make sure and capture the employer match. Make sure you go check your retirement account and find out how much you need to contribute to to get the employer match. That's the closest thing to a guaranteed return that you can have. The next account to contribute to is the health savings account. Sometimes misunderstood. Why? Because it is triple tax advantaged. You will get a tax deduction lowering your taxable income. It's going to grow tax free and then tax free withdrawals. When used for qualified medical expenses, HSA can be a stealth retirement account and if used correctly can be the most tax advantaged account you own. Best practice, pay your current out of pocket expenses from other cash other funds outside of the hsa. Let the HSA grow tax free for long term growth. And so your takeaways in this section, go check your hsa. Can you invest those funds? And two, do you need to maintain a minimum cash balance before you invest the next account? Traditional or Roth ira? This is where you get more control over your investments. Certainly more investment choices and sometimes better investment choices and potentially lower expenses. The choice between a Roth or a traditional IRA really comes down to one question. Your tax rate, your marginal tax bracket, is it going to be higher in the future or lower in the future? If your tax bracket today is lower than what you will have in the future. You may want to go towards a Roth ira. If your tax bracket is higher today than it will be in the future, then you may want to invest in a traditional ira. So your takeaway in this section Go check to see what your marginal tax bracket is and then do some planning. Use the Bolden software to project out where you might be in that marginal tax bracket in the future. The next account is our taxable brokerage account. No contribution limits, no withdrawal restrictions and we're going to be very tax efficient here. We're going to use low cost ETFs so we can really minimize taxation. We want to avoid frequent trading because the taxes can eat away our returns and so the contribution water through all is certainly a default, not a rule book There may be some reasons that you may have a different order three of the most common. Number one, you may have a low cash position, you need to build up some cash. Or perhaps you have a variable income and so you need to have a little more cash on hand because of the variability in your earnings. Number two, you may have a large purchase coming up in the next several years, maybe a down payment on a house or you have something else that you need to put funds away for. And number three, you may have a very high tax bracket or a very low tax bracket and that will give you direction on whether you flip the order between a Roth or traditional contribution either to your 401k or to an IRA. So the order can change, but the process is the same. You could use the Bold and Planner to check out what makes the most sense for you. Try adding a dollar to a brokerage account. Try adding a dollar. Try adding to your 401k and see what the different results are. Use the Scenario tool within the Bold and Planner and see what the differences are. There is no one perfect answer for everyone, but there is a thoughtful process and that process and that answer may change in five years and that's okay. That's not a mistake. It's just good planning. So where you save matters more than how much you save. If you'd like to hear more from Bolden, please subscribe to the channel below and also leave your questions and comments below. And remember, when it comes to your money, it's great if you can save some, spend some and give some. Thanks for watching and we'll see you next time.
