Financial Opportunities Uncovered: A Keeler & Nadler Family Wealth Podcast
Come take a journey with us as we explore topics and concepts from the obscure to those hiding in plain sight, so obvious that you wonder how you missed the low lying fruit. Financial planner and host Andy Keeler and his team, thought leaders, and guests discuss everything from maximizing your money and lowering taxes to how to gain the upper hand in an auction and the math behind online gambling. We discuss wealth building strategies and wander into deeper aspects of the human mind that can improve or inhibit our ability to build wealth with confidence.
Financial Opportunities Uncovered: A Keeler & Nadler Family Wealth Podcast
Hidden Savings Strategies Beyond Your 401k
Discover the hidden savings vehicles that could transform your financial future beyond simply maxing out your 401(k). Keeler and Nadler's Jake Martin joins Andy to unpack powerful but often overlooked strategies that could save you thousands in taxes while accelerating your wealth-building journey.
The conversation begins with Health Savings Accounts (HSAs), which Jake describes as having a unique "triple tax advantage". Contributions are tax-deductible, growth is tax-deferred, and withdrawals for qualified medical expenses are completely tax-free. While many use HSAs for current medical expenses, the optimal strategy is often paying those costs out-of-pocket while allowing HSA funds to grow tax-free for future healthcare needs.
Andy and Jake then explore Flexible Spending Accounts and Dependent Care Accounts, which operate on a "use it or lose it" basis but can generate significant tax savings for predictable expenses. For a family in the 25% tax bracket maxing out their Dependent Care Account at $5,000, the annual tax savings alone amount to $1,250 - essentially free money for expenses they would incur regardless.
The discussion shifts to Employee Stock Purchase Plans, which allow employees to buy company stock at discounts of 5-15%. While these plans offer essentially guaranteed returns equal to the discount percentage, Jake cautions about concentration risk and recommends diversifying after meeting holding requirements.
For listeners frustrated by Roth IRA income limits, Andy and Jake break down backdoor Roth strategies, including the "mega backdoor Roth" that enables much larger Roth conversions through after-tax 401(k) contributions.
Ready to uncover savings opportunities you might be missing? This episode provides actionable strategies to optimize your financial plan, potentially saving thousands in taxes annually while accelerating your path to financial independence. Subscribe now and share with friends who could benefit from these insights
The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations.
It is only intended to provide education about finance, tax, retirement and related planning topics. To determine which investments or strategies may be appropriate for you, consult your financial, tax or legal advisor prior to implementing. Any past performance discussed during this program is no guarantee of future results.
Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Keeler & Nadler Family Wealth is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Keeler & Nadler Family Wealth and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Keeler & Nadler Family Wealth unless a client service agreement is in place.
Andy Keeler, cfp®, is the director of Profile Investment Services and the host of the show, the Profile Investment Show. Andy Keeler, cfp®, is the director of Profile Investment Services and the host of the show, the Profile Investment Show. You're maxing out your 401k check, but what other hidden or forgotten opportunities lie in the wings for you to capitalize on? Today on Financial Opportunities Uncovered the show where we help you dig up the savings and investing strategies that most people overlook. Look, we will do precisely that. I'm Andy Kehler, and today's episode is all about overlooked savings vehicles that can help you build wealth, protect your family and even cut your tax bill way beyond just maxing out your 401k. With me today is Jake Martin, a financial planning expert who's helped hundreds of people transform their financial strategies.
Speaker 2:Jake thanks for joining us. It's great to be here again, andy. I'm excited to unpack some of these hidden savings gems with you, so let's start with health savings accounts, or HSAs, pretty common.
Speaker 1:What exactly are they and who can open one?
Speaker 2:This is one of my personal favorites, andy, so if you have access to an HSA, I highly recommend using them. Essentially, what they are is a way to save for medical expenses on a pre-tax basis, so you're allowed to deduct some money out of your paycheck and then use it later for qualified medical expenses, either this year or in the future. So what's really unique about the HSA is it has something called a triple tax advantage.
Speaker 1:What makes those so powerful as a savings vehicle and what is the triple tax benefit?
Speaker 2:Yeah, and this is really unique to an HSA which is why I'm such a huge fan of it is that the three tax advantages you get are one as you put money into it, you get a tax deduction, same way as if you put money into an IRA or into a traditional 401k. It reduces your taxable income Okay. While the money stays in there this is point two it grows tax deferred Okay. And then point three as the money comes out, as long as you're using it for qualified medical expenses, it comes out tax-free. So this is what's really unusual about an HSA is not only does it go in tax-free, it also comes out tax-free, which is unlike any other account. Typically, you're going to see some taxation somewhere along the line, but HSAs are one of the few examples where you can genuinely use tax-free dollars for these expenses.
Speaker 1:One of the categories of spending in retirement or even while you're working is health care, and so what the HSA is allowing someone to do is put money away for more or less retirement health care expenses. But the benefit of doing it this way, as opposed to other ways, is that if it's used for health it's tax-free. The 401k, while it got the first two tax benefits, it was pre-tax going in, so they got the tax deduction up front. It grew tax-deferred but tax-deferred isn't tax-free. They're going to have to pay taxes on the back end to pull money out to pay for groceries or property taxes. With the HSA it's used for healthcare. So somebody retires and they have $50,000 in their HSA. We just kind of carve that out and say, okay, that's going to be allocated to cover healthcare expenses.
Speaker 2:Let me just quickly comment on what you were just talking about there. This is actually one of the biggest mistakes that I see with how people use HSAs is they put money in and get the tax deduction but then immediately turn around and pull it right back out for current medical expenses. And I just want to you know. Quick caveat for those of you who need the money immediately for medical expenses absolutely no judgment for doing it that way. However, if you have the cash flow or other means to pay for current expenses, I highly recommend leaving it in the HSA and allowing it to grow, because that way you really do get that triple tax advantage. If you turn around and take it out immediately, you really lose that second leg of the HSA.
Speaker 2:Now, as far as how much can you contribute to the HSA, this is indexed to inflation, so it changes year by year. This is indexed to inflation, so it changes year by year, but for this year, individuals can contribute up to $4,300, and families can contribute up to $8,550. And if you're over the age of 55, each spouse that is over age 55 can contribute an additional $1,000 catch-up. So potentially, if you've got two spouses over the age of 55, you can put in a little over $10,500 for the year.
Speaker 1:And that's again 55 and over. 401ks, it's 50 and over for the catch-up Right. A little caveat there. So IRS in all their wisdom likes to make things complicated. Covered in a previous episode is the notion that it's possible for a husband and wife working at two separate employers to erroneously fund the family limit on both of their HSAs, which is clearly a no-no, and you'd have to take that money out and possibly pay penalties on it. So it's important to note that these family maximums that Jake mentioned are for a family, so you and your spouse, if you're both working, you kind of need to coordinate who's contributing to what, and it has to be a high deductible plan correct.
Speaker 2:That's exactly right, and so if you're not sure if you're in a high deductible plan, I suggest talking to your benefits administrator. They can typically tell you if you're in a high deductible plan. There are certain minimums and maximums for what your deductible needs to be, so that's very specific. So if you're not sure, make sure you check before you just start contributing. The other thing you know kind of along the lines of having double coverage, actually have a personal example here If you're covered by two different health insurance plans. Here, if you're covered by two different health insurance plans, both of them need to be high deductible plans in order to contribute to an HSA. So, for example, I have access to one here at KN Family Wealth. However, my wife also has family coverage for our whole family and that one is not a high deductible plan. So because I've got coverage through two different employers, I'm not eligible for an HSA. So watch out for that double coverage. That might disqualify you.
Speaker 1:Sticky wicket there. What about flexible spending accounts? You used to hear about these a lot back in the 90s, early 2000s. You don't hear so much about them anymore. Hsas have kind of stolen the stage on that. But what is an FSA?
Speaker 2:Yeah, you're exactly right. I mean, hsas have really gained in popularity and so I think, as a result, you don't see these as often. But the flexible spending account functions very similarly to an HSA, in that you can set aside money specifically for medical purposes. Now, this is typically done through your employer, so oftentimes you can have money withheld out of your paycheck and put into an account specifically for medical expenses. But the important caveat here is that this is a use it or lose it kind of account, so if you don't use it by the end of the year, it's just gone, and that's the big difference between an HSA and an FSA.
Speaker 1:And that's probably why most people use the HSA, because they can just keep accumulating those dollars. With the FSA you kind of have to keep track of what your expenses are and be sure to turn those in by year end. But if you have the option to have both, you want to use both. Just be aware that on the FSA you need to be paying pretty close attention, exactly.
Speaker 2:The FSA also has slightly lower limits than the HSA. For an individual, you can contribute $3,300 a year or $6,600 for a couple. Again, you just want to have a good idea of what you actually spend so that you don't run into that situation where you're forfeiting some of those dollars at the end of the year.
Speaker 1:So let's pivot to dependent care accounts. This is pretty obscure. I don't see these very often, but dependent care accounts, or DCAs it's something I wish more people talked about. Jake, can you break down what a DCA is and why they matter for working parents?
Speaker 2:There's actually a couple different iterations on the flexible spending account that we just talked about. This is essentially a flexible spending account, except it's for dependent care expenses rather than medical expenses. So think of things like summer camp and aftercare for your kids and daycare, and this is also not limited just to parents. If you have any dependents, like older parents, that you're taking care of, that you've got expenses for, they would also qualify. So it's an FSA, essentially, that you can take a tax deduction for, but you can use it for these dependent care expenses instead.
Speaker 1:And I'm assuming that there are tax benefits associated with a DCA. Is it pre-tax?
Speaker 2:It's the same idea as the flexible spending account. So it would go in pre-tax and then it comes out tax-free as long as you're using it for the qualifying expense. So, for example, a dependent care account, in 2025, you can contribute up to $5,000 as a household. So, just as a simple example, if you're in the 25% tax bracket and you contribute $5,000 as a household, so just as a simple example, if you're in the 25% tax bracket and you contribute $5,000 for dependent care expenses, that would save you about $1,250. Now, keep in mind these are not like new expenses you're creating, right? This is your kids are going to summer camp or they're going to aftercare or daycare. These things are just happening. You already know what the expenses are going to be. If you just funnel it through a DCA first, then you save yourself that $1,250 a year.
Speaker 1:You're talking about the savings. The tax savings on the $5,000 is roughly $1,250 a year. But when you add up the tax savings of these three vehicles together, if you had the ability to fund an FSA, a DCA and an HSA to the max, that's $20,000 you're able to put in pre-tax and the money either grows tax-deferred or tax-free depending on how it's used. That's what $7,000?.
Speaker 2:Depending on what tax bracket you're in is exactly right. I mean substantial savings, and keep in mind, most of these expenses are things that are going to happen anyway. You're going to be paying for these, so you might as well do it in a tax-advantaged way Makes sense.
Speaker 2:So one other cautionary tale on DCAs is that if you don't use it, just like the FSA, you lose it by the end of the year. So I actually had a client that this happened to. They forgot to submit the reimbursement claim by the deadline and they lost that $5,000 that they contributed over the course of the last year. So talk about a gut punch. You're trying to do things that are helping you and then if you miss the deadline, it's a big, big penalty.
Speaker 1:We call that an oops. Thanks for sharing that, Jake. I bet a lot of listeners can relate and will certainly double check their deadlines now.
Speaker 2:I hope so and, again, my advice is to set some calendar reminders. Keep your receipts organized and submit your claims as early as possible. A little preparation can really save a lot of regret.
Speaker 1:That is for sure. So another option that really only available for employees of publicly traded companies.
Speaker 2:What these allow you to do is to purchase company stock at a discount of whatever the current market rate is, and I've seen that this discount is anywhere from 5% to 15%. And so basically, the company is saying we want you to invest in our company and we want you to be a shareholder, and so we're going to give you this discount, to give you an incentive to buy into it.
Speaker 1:When I think of these. Certainly no return is guaranteed. The stock market has averaged 10% over the last 70 years. Certainly not guaranteed. But with an ESPP as Jake said, most companies in my experience 15% is the discount. So they're essentially allowing you to buy something at a 15% discount, which then means if you then sell it later after a certain holding period, typically the company's going to say you can't turn around and sell it the next day or next week, you have to hold it for a period of time. But if let's say that it's a one-year holding period and the stock does nothing, you made 15%. If the stock went up 10, you made 25. So it's pretty much a no-brainer if it's offered, if you have the cash flow to put into an ESPP.
Speaker 2:Yeah, andy, I think of this a lot, in the same way as a 401k match that an employer would give you. These are free dollars that your employer is offering you. You might as well take advantage of these and get those free dollars, like you said, even if the stock doesn't go anywhere. Kind of guaranteed that. 15%.
Speaker 1:Yeah, and one of the rules in building wealth is to pay yourself first, and so setting up systematic investments into various things. You can do this through payroll deduction, and so it makes it automatic and painless. Is there anything that people should be cautious about?
Speaker 2:The big risk here that I've seen people who have participated in these year after year after year is you can actually start to build up a pretty substantial portfolio of single company stock, and so that's something that in the investment world we call concentration risk. Anytime you've got too much of your wealth tied up in one company, you're really dependent on how that company fares over time, and, especially since you probably work at that company, you've also got your income tied to the welfare of that company right? So not only are we concentrated in one stock, we're also our job is dependent on that company. So we typically recommend diversifying out of the SBP into something else as soon as you reach that holding period requirement. But again, on the front end, just an absolute no-brainer to participate.
Speaker 1:Yeah, and the other idea would be, if you happen to be getting restricted stock units and in my experience, when you compare the amount of stock people get in RSUs versus the amount that they're putting into the ESPP ESPP balances tend to be on the lower end, the RSUs tend to be on the higher end. So you could diversify away the risk by selling off the RSUs once you become vested and it's maybe not as important to do that with the ESPP, but you definitely want to take advantage of it. A company match companies, basically giving you a 15% raise on the money that you're putting in there. Why would you not do that? Exactly right? A lot of high-income listeners are frustrated by Roth IRA income limits. Jay, can you explain the backdoor Roth IRA and something called the mega backdoor Roth 401k?
Speaker 2:Yeah, this is a great topic. I'm a huge fan of this strategy, so let me first explain what people are bumping into here. To contribute to a regular Roth IRA, there are income limits that you need to be below in order to just make a regular contribution of $7,000 or $8,000 a year, got it? And so for an individual, if you make $165,000 or less, you can just contribute to a Roth IRA. If you're a couple, you need to make $246,000 or less. So if you're in the situation where you're above those limits, you can't simply just make a Roth contribution, like you might have earlier in your career. So what do you do? And that's where this backdoor Roth strategy comes in. And that's where this backdoor Roth strategy comes in.
Speaker 2:Essentially, the way this works is you use a traditional IRA. First, you make a contribution to a traditional IRA and then move it over to the Roth. The big difference here is that when you put money in the traditional IRA, normally you would take a tax deduction when you do that, but in this case, we're going to make a non-deductible contribution meaning we're not taking a tax deduction and then we immediately convert it over to the Roth IRA. So it's kind of this extra hoop that we've got to jump through. But the IRS does allow you to make these after-tax contributions to your IRA and then they allow you to make these conversions to the Roth. Functionally, all you've done is just make a Roth contribution, but you've got to kind of bounce it through the traditional IRA first.
Speaker 1:So in a previous episode we talked about a situation we encounter fairly frequently a couple filing a separate tax return. Married filing separate have both contributed to a Roth IRA and their income is over the $10,000 limit, so that's not allowed. As Jake indicated, there are limits on how much a married filing joint couple can earn before they lose the ability to contribute to a Roth. But this married filing separate trap disqualifies folks from the ability to invest in a Roth at the same income limits. It's only a $10,000 income limit. There's another sort of obscure rule the IRS has called the pro rata rule. Can you explain that for us?
Speaker 2:Yeah, and this is one of the biggest pieces that hold people back from being able to do the backdoor Roth contribution, and the reason for that is that the IRS views all IRA dollars as one big bucket. It doesn't matter if you separate them into separate accounts, it doesn't matter if you can tell exactly which dollars are after tax and which ones are pre-tax. The IRS views them all as one big bucket, and so what the pro rata rule says is that if you already have some money in your IRA, that is pre-tax money-.
Speaker 1:Let's say it's an old 401k rollover. There's $500,000 sitting in Mary's IRA account.
Speaker 2:Perfect example. So you've got $500,000 in a traditional IRA. It's all pre-tax money. Now we try to do this after-tax contribution of $8,000. When you put that in, you're not allowed to just take the after-tax dollars and move it over to the Roth, which is what you want to do.
Speaker 1:And the idea there is with this backdoor Roth you're contributing to the IRA let's say it's $7,000. But then you turn around and move $7,000 to the Roth and because there's no gain on it, in theory you would pay no income tax. Because Roth IRAs are funded with after-tax dollars, you don't get a tax deduction for it. So you contribute to a non-deductible traditional IRA no deduction, there's no gain. You then turn around and take that cost basis, move it to the Roth and that's where you start investing it and making money.
Speaker 2:Yeah, so exactly. But when you have all these pre-tax dollars in there, when you go to convert it over to the Roth, you have to do it proportionally. You can't just choose the after-tax dollars. You have to proportionally move some of the pre-tax dollars and some of the after-tax dollars together and pay taxes on it.
Speaker 2:It creates this big headache and generally we don't do this. If you've already got money in a traditional IRA Now there is a nice workaround and that is, if you are still working and you have access to a 401k, you can actually roll your traditional IRAs back into a 401k plan. The IRS views 401ks as a separate bucket that they don't consider when we're doing these backdoor Roths. So if you can empty out the traditional IRA into a 401k now, we can do this backdoor Roth without any complications of the pro rata rule.
Speaker 1:So I have a client that had $600,000 in an IRA with me. He was still working. We wanted to be able to do the backdoor Roth and I exercised my fiduciary duty, putting the client's interests ahead of mine, and I said you need to move that $600,000 that I'm getting paid to manage over to your 401k so that we can do this Roth strategy. And he's been doing that now for probably 15 years. So I would guess if there are folks that are getting trapped by the married filing separate Roth IRA contribution scenario, there are probably a lot of people that are doing Roth conversions that probably shouldn't be because they have an IRA balance lurking out there somewhere. That's exactly right, Andy. So what's the mega backdoor?
Speaker 2:So this is the same idea of making after-tax contributions and then converting them over to the Roth, except, instead of doing it inside of the IRA vehicle, we're going to do it inside of the 401k. Now, a 401k has much higher contribution limits than an IRA does. So an IRA, you're limited to $7,000 or $8,000 a year, depending on how old you are. A 401k, though, you can contribute the statutory limits of about $70,000 between employee and employer contributions. So here's what you can do If you hit the maximum you can contribute as an employee, which this year is, I think, about $31,000,. Once you hit that maximum, you're allowed to make additional after-tax contributions to the 401k all the way up to that $70,000 statutory limit.
Speaker 1:If the employer has an after-tax 401k option, which is pretty uncommon, but they're out there.
Speaker 2:That's exactly right. So you need to make sure. Can I actually make these after-tax contributions and do they allow conversions within the plan so that I can move those after-tax contributions over to the Roth portion? Now, the nice thing here is that within the 401k world, we don't have to worry about the pro rata rule. That's not an issue. So you can just convert the after-tax dollars over to Roth. So if your 401k allows this and you've got the cash flow to do it, you can really really maximize your savings.
Speaker 1:Yeah, we've had clients that worked for typically like Fortune 500 companies, big employers that had this after-tax option and they put you know over the years, $350,000 into it when they leave that company. We rolled it into a Roth and you know if you were just contributing, whatever the Roth IRA limit was, if you qualified to make a contribution. I think the limit was $4,000 at one time, then $5,000, then $6,000. Now, as Jake said, it's $7,000. It would take you a really long time to get a $300,000 balance into a Roth IRA. So this is a great way to do it. Jake, thanks for all your insights and for walking us through these options. I appreciate you joining me today.
Speaker 2:It's been great, Andy. I hope we help some listeners out there find some of these hidden savings gems that I love to talk about.
Speaker 1:If you took away one idea from today's episode, it's that your savings strategy doesn't have to end at the 401k. With just a bit of research and planning, you can use these vehicles to save more, cut your tax bill and reach your financial goals faster. Remember talk to your tax or financial advisor before making any big moves. If you learned something useful, please subscribe and share this episode of Financial Opportunities Uncovered with a friend.
Speaker 3:The opinions expressed in this program are for general information purposes only and are not intended to provide specific advice or recommendations. It is only intended to provide education about finance tax, retirement and related planning topics. To determine which investment strategies are appropriate for you, consult your finance, tax or legal advisor prior to implementing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always, please remember, investing involves risk and possible loss of principle. Please seek advice from a licensed professional. Keeler and nadler family wealth is a registered investment advisor. Advisory services are only offered to clients or prospective clients where keillor and Nadler Family Wealth and its representatives are property licensed or exempt from licensure. No advice may be rendered by Keillor and Nadler Family Wealth unless a client service agreement is in place. Thank you.