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Are you saving in the wrong type of account? Where should you be saving for retirement and how can you minimize taxes? All that more on today's episode of The Retire One Show.

Hello and welcome to The Retire One show, the show designed to help you get to retirement, but most importantly, stay retired. I'm Johnathan Rankin. I am the founder and CEO of Theorem and Wealth Management, and I'm joined as always by my co-host. Hi, I'm Melissa Rankin. Thank you so much for joining us.

Thank you for being here. I hope everybody is having a great holiday season. This is our last episode of the year. Very good. You guys thought he was gonna say ever? No, definitely not. You are stuck with us. So what do we want you to do? So make sure that you're here every week. We want you to subscribe so you never miss one of these amazing episodes.

That's right. Hit that subscribe button. Join us on this journey. We really appreciate it. Today we are gonna be talking all about where you should be saving, what type of account you should be saving into, because we recently released a video introducing what we call the retirement blocks, the four retirement.

And we're gonna link to that right here. So make sure you check that out if you haven't watched that yet. Um, but those four retirement blocks are very important, aren't they? They are very important. And again, you definitely do not wanna miss that other episode, but it goes into the four. Um, The four retirement blocks, which are your income block, your expenses block, your savings block, and your lifestyle block.

So the goal with these blocks is to help you simplify your retirement because retirement can be confusing, it could be overwhelming. And the way I like to equate it is if you're building a house, the first thing you wanna make sure is that you have a steady foundation. If you want the house to last, you know, like ours, 103 years.

You want it to have a sturdy foundation. Absolutely. And the first thing you do when you're building a brand new house is you don't go in and start picking out the furniture yet.  or paint colors. Yeah. You, you save the finishes for later. And this is, A whole process to help you establish that, that foundation.

So the goal is you complete each one of these blocks before moving on to the next one. So once you have a good idea of your income block, then you can move on to the expense block and have a good idea around that, and then to your savings block. And this is gonna help you simplify and focus. The things you really need to focus on with retirement and really just help boil it down to what's important.

So with that in mind, we're gonna focus today on the savings block. That's right. And for those who haven't checked off the video, make sure that you do, because the savings block has four categories and it's very simple. This is way you do to make sure that you're working through this block. Take a piece of paper, put a line down the middle, and a line across.

four categories. It's just gonna help you visualize these different categories within this savings block. Visualization's very important. You wanna be able to see it, and it kind of helps. It's just like a, for me, a to-do list like you wanna. Put everything down and then when you get to check stuff off, you get like a little yay self.

That's all. That's all it is. Little pat on the back. Exactly. So the four categories of the savings block are amount, account taxes, and investments. And today we are going to be focusing on the account part of this block. So we get the question all the time, what type of account should I be saving in? Is it a Roth, is it a traditional account, is it a brokerage account, an hsa?

We get these questions all the time. We do. We get that question a lot, but today we're gonna talk about where to put your money now and how you can maximize your savings. Where should someone start saving? So the first place that someone wants to save is making sure that they have an emergency fund, build up that emergency fund or something like to call it a rainy day fund.

I guess I don't really understand where that concept comes from, because typically when it rains you stay inside. Maybe that's just me, but. You avoid the rain? I do, but I think it's so you don't stuck, get stuck in the mud or something like that. If anybody knows, you could let us know. Yeah, please let us know.

But, uh, build up that emergency fund before you do any sort of investment savings before you save in your 401k. I know a lot of people think, well, let me just put money into my 401k, but if something happens, if there is an emergency or I guess a rainy day,  to get money outta your 401k. There are typically penalties and taxes involved, and it's a little bit more of a hassle than if you just need money for an emergency.

You want to have that built. So how much should someone save? So we always advise people to try to get to six months, I mean, really three to six months of living expenses. This is your house payment that is one heck of a rainy day. That is, you know, house payment carpet. Well, you know, we are possibly headed into a recession and you know, we know that employee employers cut back and people lose our jobs.

So this is. Really in an effort to make sure that if that rainy day happens, you are taken care of. So really try to get to six months. Okay? So once you've got your six months, your rainy day fund, your emergency fund, where should your money go next? So the next place you wanna start investing is seeing if your 401k does offer a match and try to contribute up to that match.

Take full advantage of that because yes, that is free money and I know people are probably watching this going, well, why wouldn't I invest in that before building up that emergency fund because it is free money and I'm giving that up. Once again, emergencies happen and you want to have that first. So then easy access.

Easy access. So then after that is built up, then invest in that four  if it has a match. Okay, so now that we've established the 401k part, here's the big question. Roth or traditional 401k, All right, so let's boil this down. Let's make this as simple as possible. We get this question all the time. So the big difference is if you aren't aware, so a traditional 401k put the money in, it's pre-tax.

All of the growth and everything is tax deferred. When you pull money out and withdraw in retirement, you pay ordinary income taxes. Now, on a Roth, you put the money in, it's after tax. All the growth and distributions later on in retirement are tax free. So there are pros and cons to. . But to simplify that decision, you really wanna look at what is your income rate today, and is it going to be higher today while you're working, or is it going to be higher in when you're in retirement?

Because if you think your income taxes will be higher now, then contribute to a traditional 401k, uh, otherwise a Roth 401K or Roth IRA would be perfect. But there are some things that you want to consider. Um, for example, we don't know what future taxes are gonna look like. I mean, do you Sure.

Unfortunately, no, we don't. Uh, you all different show. If I knew that kind of stuff. That is true. This would be the, uh, crystal ball, the prediction show,  the prediction show with Melissa Rankin and maybe I'd be the co-anchor . Uh, you know, we don't know what state you're gonna be living in because if you're living in a state that has high state taxes like California or New York and you plan on moving to Florida or the lovely state of Texas, you know that ha where many retirees go.

That is true. Uh, then you. Look at a traditional right now because you're not paying those state and income taxes. So it really does vary from state to state and person to person. But a traditional gives you one thing that a Roth IRA or Roth 401k doesn't, and that is options you get to choose when you're paying your taxes.

Options are good with a Roth. You're paying them today no matter what. No matter what. Whereas in a traditional account, you at some point can convert those into a Roth. So you have that flexibility to. Say there is a year where your income's down and you decide, let me convert some of this money into a Roth and pay tax at a lower rate, then it gives you that flexibility.

But one thing you could do, you could do both. There's an idea, there is no rule against doing both. So, uh, just do something, do something. But those, those are the options. You do have flexibility if you do both, because you'll have a little bit of each. Uh, but there is no, this way or this way is the only way to.

you can really base it on your specific circumstances and where your current taxes are right now. So it really comes down to the individual yourself. In the individual. Of course it does. Really comes down to that. That's right. So once you start determining where you're going to save, should you just save up to the match or should you do more?

So the first thing you wanna do is up to the match. So get that free money. No one wants to give up free money. Don't leave anything on the table. Nope. And then what you wanna do, take a step back from your saving.  and go back to your expenses, and this is where you wanna look at, do you have any high interest credit card debt?

Because knocking that out first is going to be very important, especially credit card rates are what? High teens, maybe sometimes low twenties. , there's not many investments that can give you a consistent, you know, 18 to 20% rate of return without much risk. But at least when you know you're paying off that debt, that's something that you are getting that money back in your own pocket.

So pay off those high credit card debts. That's where you want to go to next. Once you get that match, then start paying off those high credit card debts. Okay, so once you've got the credit cards all paid off and you're all good to go, do you go back to the four oh. Not yet. Not just yet, but wait. Oh wait.

There's more. Uh, if you have the ability at your job to take advantage of a health savings account. So this is, this is probably his favorite product ever. If you've watched any or listen to any of our other episodes, I think he finds a way to mention it in every single one. I just, I think this account is very underutilized for retirement planning.

Now I know, you know, for those who don't know, an HSA or health savings, Is a triple tax advantage account where the money goes in pre-tax, the growth is tax free. And when you pull money out and you use that money for medical related, uh, causes or needs, that money is tax free as well. Self prescriptions, doctor visits, things like that.

Absolutely. So the catch is that you have to be a part of a high deductible health plan. Now, I know that depending on people's health, a high deductible plan. Practical. I mean, you hear high deductible and that sounds scary. Yeah. If your deductible's $15,000 and you're going to the doctor, all the. You know, maybe it doesn't make sense to, uh, to be in that plan just so you could put away some, but also if you're gonna the doctor that often, maybe you could find a new doctor.

That's true. Hopefully they could get you a little more healthy there. But, uh, an HSA account, you wanna try to max that out. That is a great place to then go after you hit the match and after you knock out that credit card debt because, you know, it is a triple tax advantage account and is my favorite account there is it really is his favorite account.

Okay, so let's recap. We have the emergency fund, the 401k, up to the match. Any high interest credit card debt, you need to all paid off. And then again, the favorite product of all the hsa. So what's next? All right. A lot of people think, all right, let's go back into the 401k. Let's ma, you know, max that out when we'll get there.

But if your company offers an employee stock purchase plan, now this gives you the ability to buy shares of your company at a discount. Take advantage of that discount. Sometimes it's 10, 15%. You know, sometimes it might be a little more. Whatever that discount is, take advantage of that. Put whatever you can in there because you're getting stock at a discount.

That doesn't mean you have to hold the stock forever. Doesn't mean that you have to, you know, just invest only in that company, but take advantage of the discount. And if you want to diversify, sell it as soon as you can, and at least you're capturing that. . Okay. And what if an employer doesn't offer something like that?

Then where should your money go next? So if you don't have access to an employee stock purchase plan, or let's say you max that out and you take it full advantage of that, now it's time to go back to the 401K or employer plan for three B, whatever you have, and max that out. You know, in 2023, you could put $22,500 into.

It doesn't include the ketchup contribution. Uh, if you're over the age of 50, which as we talked about in our Secure Act 2.0 video.  now is index to inflation. So there's always that. Make sure you catch that. If you haven't checked that out yet, um, very good episode, you don't wanna miss it. Very good. So, uh, so that's where you wanna go.

Now is the time to go back to the 401k. Okay? So once you have done all the other steps that we've gone through and you maxed out your workplace retirement, then what? All right, so you maxed all those other things out. Which also good job, you little saver if you've done all that. That's right. If you are eligible based on your income, this the time where you wanna max out a Roth ira.

You know, depending on your income, if you're not phased out, you can start maxing that out. Uh, but if you can't do a Roth because of income restrictions, then the next best place to save is going to be just a traditional taxable brokerage account. Um, this allows you to invest and have flexibility. Now you want to make sure.

You know, you are being cautious because there are capital gains tax when you're investing in a brokerage account. But having, you know, having that type of account really does allow you to have some flexibility. . That makes sense. Having a diversified asset location is important anyway. Mm-hmm. , I mean, it can help you save on taxes, it can help you with flexibility of an un, you know, that rainy day comes up.

I mean, just having the flexibility there is good. Yeah. The, I mean, think about this as a, this is now your emergency fund that you're able to invest because you've got that set aside in cash because you've already done all the other stuff. You've already done all the other stuff. So now this is just excess.

So you know, the hope is that if for some reason there was an emergency, you were. Go through that emergency fund, and then if you needed to, then you could start liquidating some of the taxable brokerage account to then, you know, help with whatever that emergency is. So, uh, now one last place to save, but wait.

We said there's more. So one last place to save. Uh, once you've built up, you know, a taxable brokerage account, you feel like you've got comfort and you feel good about where you're at there, one place to look would be. After tax contributions to your workplace retirement plan, some 401ks or four three  do offer the ability to put in money after tax into those accounts.

Now, this allows you to save money.  after you've already maxed it out and it allows that money to grow tax deferred. Now, there is no tax deduction like there is on your traditional contributions, but it does grow tax deferred. And when you start withdrawing the money in retirement, the contributions aren't taxed.

So let's just say that you put in $20,000, it grows to 40. Okay, well the 20,000 you put in, you get that back, there's no taxes on that. The 20 that was growth that is now tax at ordinary. . Whereas one thing you gotta think about, like we mentioned in a brokerage account, it would be tax at capital gains. So just someone, so why wouldn't you just invest in the brokerage account?

Well, with this money, you do have the ability to do what's called a mega backdoor Roth conversion. So this is where you can take that after tax money. And convert that into Roth assets. Uh, now this move allows you to, like any Roth account, take money out when you're retired, tax free. You, you know, there are a lot of different complexities when it comes to this maneuver, so you wanna make sure it's a very delicate one.

Yeah. This strategy, you wanna make sure that you're working with someone that is a professional to do this because it is someone like us. Yes, someone like us. It is a very big benefit if you're able to take advantage. Uh, because you can put a lot of money into a Roth by doing this, but you wanna make sure you do it right, because now we're talking about tax implications and a lot of different facets when it comes to doing this.

You wanna make sure you do it right. So, um, if it fits your specific circum uh, situation, it's a great place to put money in and utilize that maneuver. But make sure it, it fits you. That's right. It's right for you. So, you know, that, that brings us to, you know, looking at this. Whole savings block. You know, I want you to think about in this part of it, when we're talking about accounts, think of this.

A bucket approach. You know, these are all buckets and once you fill up that bucket, so you fill up that emergency fund bucket, you once it's filled, go to the next bucket and then, you know, go on to the next one after that. And then once all those buckets are full, that block is full. That's right . Just to keep it all in visualization for you guys.

So to recap, we have the emergency fund, the 401k, up to the match, any high interest credit card debt, anything like that, get that all paid off hsa. Very good employee stock purchase plans, max out your 401k. Mm-hmm. , and then possibly a Roth IRA brokerage account and after tax 401k. So lots of options there, but that's how we think you should start the That's right.

Bucket process. That's where you wanna start directing your money. If you don't know where to start, that's where you start. Fill those ins. Sequential order, just go down the list, you knock one out and move on to the next. And then if you say, you get to the point where you go, well, all right, I maxed out my four.

I don't have any more money that I could save guys. We're not able to just to save a hundred percent of my paycheck here. So, you know, stop where you can, you know, but at least this is the path that you want to get on to make that, you know, savings most effective from a tax standpoint and giving yourself that ultimate flexibility because that is very important.

So if you do have specific questions, Your savings. Where should you direct your money, you know, or other retirement questions? Head to retire one show.com or use the link in the description below. Schedule some time with a member of our team. We would love to have a conversation with you and help you out.

Absolutely. Before we gotta here, Mel, what do we want people to do? We want you to subscribe again. You definitely don't wanna miss one of these episodes. And be sure to check out those other ones that we mentioned. That's right. Make sure you check out our Retirement Blocks episode to go. This whole concept of how you can simplify retirement.

With that, I'm Johnathan Rankin. And I'm Melissa Rankin. Thank you so much for joining us.

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