"We Make $250k - What Should We Do Next?"

This episode focuses on financial strategies for high earners, particularly those curious about investing and managing a significant income efficiently.

1. Evaluate your tax bracket to decide between Roth and pre-tax 401k contributions.
2. Consider a backdoor Roth IRA if direct contributions are phased out due to high income.
3. Focus on building a robust financial foundation early in your career to prepare for future uncertainties.
4. Utilize taxable accounts for additional investment opportunities and easier access to funds.
5. Strategic tax planning is crucial for maximizing take-home pay and future savings.

1: Introduction and Viewer's Query

Overview of the episode's theme on managing a $250k income effectively. Discussion begins with a viewer's question about investment strategies after maxing out a Roth IRA. Brian Preston: "What do you suggest we do now? What's next?"

2: Tax Strategies and Investment Advice

Detailed discussion on tax strategies, including the benefits of traditional vs. Roth 401k contributions based on current tax brackets. Bo Hanson: "Our general rule of thumb is if you add up your marginal federal and your marginal state, and it's greater than 30%, the tax benefit today of doing pre-tax contributions is pretty attractive."

3: Advanced Investment Strategies

Exploration of investment options beyond retirement accounts, focusing on taxable accounts and their benefits. Brian Preston: "Capital gains are taxed in a better way, dividends are still taxed in a very favorable way."

1. Assess your tax situation annually to adapt your investment strategy effectively.
2. Utilize a backdoor Roth strategy if your income exceeds the limits for direct Roth IRA contributions.
3. Diversify your investment accounts, including taxable accounts, to prepare for early retirement or financial needs before typical retirement age.
4. Keep lifestyle inflation in check despite high income to ensure long-term financial stability.
5. Invest in knowledge by understanding financial basics to make empowered decisions about your money.

"My wife and I make $250k a year at 26 years old, and we have lost the ability to put money into our Roth IRA. We have a fully funded emergency fund, Roth 401(k), and were funding Roth IRA. What do you suggest we do now?"

People

Brian Preston, Bo Hanson

Companies

Abound Wealth Management

Books

None

Guest Name(s):

None

Content Warnings:

None

Unknown Speaker
Vincenzo has a question for you. He says, my wife and I make two hundred fifty k a year at 26. Whoa. And I have lost the ability to put money into our Roth IRA. We have a fully funded emergency fund, a Roth, four hundred one k, and had funded our roths.

What do you suggest we do now? What's next? All right, I'm going to give a step one, and my step one is going to be in regards to the Roth 401K. So if you want to be thinking about your steps, two, three, four, here's the first thing I want you to do to Vincenzo. I don't know what state that you live in, but I want you to go look at last year's tax return.

Bo Hanson
Here it is. We just got through tax season, so it's likely you've already filed your tax return. And I want to see what marginal tax bracket you fell into, both in the federal and the state side. Because at $250,000 of household income in most states that have an income tax, there's a really good chance that you're beginning to teeter over that place to where it might make sense for you to do pre tax 401k contributions instead of Roth contributions. Our general rule of thumb is if you add up your marginal federal and your marginal state, and it's greater than 30%, the tax benefit today, even at 26 years old, of doing pre tax contributions, is pretty attractive.

Every dollar I put in saves me $0.30 in taxes. That's pretty attractive. Now, if you happen to be in a no income tax state, and your taxable income is in such a place that you're below 25%, okay, then Roth 401K makes a lot of sense. But at that income, I would encourage you to go visit that. So now his question is, Brian.

All right, I can't do the Roth anymore. Cause my income is too high. Now what do I do? You can't do a Roth contribution directly. However, assuming you don't have any other iras besides the Roth IRA, meaning you don't have any rollover iras from a previous job, or you didn't make traditional contributions where you took a tax deduction or a sep IRA for a side hustle, then you might qualify for what's called a backdoor Roth or a conversion Roth strategy, where you'll make a contribution, a non deductible contribution, to a traditional IRA, and then you can convert that into a Roth, and it will be a tax free transaction.

Brian Preston
A lot of people screw that part up, but it will be a tax free transaction because you didn't take the deduction on the IRA contribution and voila, you have a Roth contribution for the year. And this all became, came on the scene from back in 2010 when they ripped off any income limitations on Roth conversions. So that opened up this strategy where you could make Roth contributions into a traditional IRA or make a traditional IRA that then gets converted into Roth money. But I do agree with Bo that you ought to pay attention to the tax rates. And then don't forget, when you go look at financial order of operations, if you go to moneyguy.com reseller, when you get to step seven.

And by the way, got a book coming out May 28, millionaire mission. It tells the origin story, even goes deeper into some of these strategies. I'm talking about when you get to step seven, the hyper accumulation. This is for people who are getting and saving and investing greater than 25%. And all this in the beginning is to get you a financial foundation.

It's really step seven where we start talking about the strategy of, hey, how are we actually going to use this money? And a lot of people, when they get to that point, because there's so many tax favored accounts, whether it's your Roth accounts or it's your 401k account work that by the time you get to step seven, we go, hey, since you're already loading up all those retirement accounts and you might be one of these hyper accumulators that's thinking about retiring in your fifties, and you need this before we even reach 55 or 59 and a half, why not set up? Because you can have tax location buckets. The three buckets we talked about in chat in step seven is why not have an after tax individual or joint brokerage account and you can start investing in there. Nothing wrong with buying index funds in that joint investment account.

So that way that money still grows in a tax favorite way. Capital gains are taxed in a better way, dividends are still taxed in a very favorable way. But now you have much easier access to this money if you do need to retire early or if you just want to have the ability to reach assets, if you're investing in something else. I mean, when I've bought commercial real estate or done anything in something where I just needed assets really quick, of course cash is your first stop, but then you can look in those taxable accounts and say, hey, what's the tax impact? But otherwise, this is going to be a pretty easy way to come up with money to take advantage of this opportunity.

Bo Hanson
I just want to say, holy cow, 26 years old, quarter of a million dollars income, quarter of a million dollar house. That's insane. You are literally at the very beginning of your journey and the world is your oyster when it comes to finances. If you can take advantage of this opportunity you have right now, the future looks very, very bright and you should recognize that. I will say one final thing is make sure that you're.

Brian Preston
Because I don't know, when I hear this much income, I'm assuming this person will hopefully be able to make this forever. But working with professional athletes and others who had large sums of money, but at young ages, make sure you're putting a lot of that money into investments and other things and not just increasing lifestyle, because I think that's a risk that I worry about. And I think you could do professional athletes, you could talk about what Dave Grohl talked about in his book, where when he had early success, he immediately started saving and investing because he had had a conversation with his father where they had talked about, hey, that you promise that you would keep getting big checks like this, so get that financial foundation underneath you as fast as possible so your army of dollar bills can start working. Because what you don't want to have is you tell some woeful tell when you're in your forties and fifties and be like, I was crushing it in my twenties, but then industries changed, or I was no longer able to make this money, and then it all went away. And unfortunately, I was living this lifestyle that didn't reflect, you know, and I wish I'd have done a little bit more then.

Now. I'm hopeful that 15 years in the future, you're still crushing it even beyond this quarter of a million dollars a year, and. But at that point, you'd be like, okay, now my die is cast. I've reached my, you know, I've gotten to this critical mass where my money's doing, so now you even have more flexibility to own your time that much sooner. Yeah, we actually have clients who, who have done this.

Bo Hanson
They were in an industry making hundreds of thousands of dollars, and there was a seismic shift in that industry. Nothing that the client did wrong, nothing that changed, but they were diligent savers and I mean, they were killing it on the savings spectrum. So when he went from making multiple six figures down to making not even six figures at a new job, and he wasn't able to save at the same pace for a number of years, he was still in a fantastic financial position. As his income did begin to increase, as he did begin to change his circumstance, it was because of all that early saving that he did that they were still in a great financial situation. So I love that advice.

And we've seen that play out very practically awesome. 26. 26. That's crushing. Thanks for your question, Vincenzo.

Unknown Speaker
All right, we're going to move on to mama. Didn't raise no foo's question. It says, can we do a fun question? Like, how is Brian liking his newish model x plaid? Hey.

Brian Preston
Well, there's a question. There is a question. Is that the question? That's the question that she wants? Or I guess mama didn't raise enough food.

Bo Hanson
Could be here, or she. Yes. How are you? Like, so it's interesting, Brian, you've been on this journey, right? Really, really excited about Tesla's pretty early on, right?

And when the very first, not the first Tesla, but the first affordable Tesla came out, the model three came out, you're like, I got to see what this is all about, and you did it. And I got to say, if someone has known you, gosh, for many decades now, it's one of the purchases I've seen you make that I've not seen, like, an iota of buyer's remorse when you bought your very first Tesla, and it seems like that's maybe held true through time. Is that the case as you've. As you've changed through their automobile lineup? So I don't mind, Sharon, I got the model three in 2018.

Brian Preston
It was one of the earlier ones. I loved it, and I was like, man, this is going to revolutionize the way cars work. And I don't know of any Tesla owners that are like, these cars stink. I know there's a lot of. A lot of people hate Tesla.

THEY Hate elon. But I'm just telling you, anybody who owns the vehicles, they're fun to drive. There's a lot of good that I get out of driving TESLA, and the full SElF driving is coming a long ways. I am nervous about some of the decisions that are being made, but overall, I still am a happy Tesla owner. So I went for model three, and then I got this in the pricing.

During the pandemic or post pandemic, there was these crazy pricing deals because I had put in a deposit on the Model y when they announced it, but I didn't. I loved my three, but they were going to honor the old prices. They were going to throw in full self driving at this really cheap price. So I jumped on the y, and I sold my model three to, ACTUALLY, a coWorker, and they're loving it stilL. I mean, every time that she's in town and they're driving, and I'm like, I still love how beautiful that car is because it was a good looking car with my midlife crisis red.

Bo Hanson
I was GOnna say I was about. To beat you, too. But then, once AGAin, ELON and his crazy pricing games, they offered you could have a one time transfer. You know, I fell for the one time. ONE time.

Brian Preston
No, it's. They're gonna offer this every time they need a quarter end boost in sales. I've come to realize they're, like, a one time deal if you want to upgrade your Tesla. So I was like. And they dropped.

They slashed the prices on these model x's. They were like, one. If you wanted the plaid, it was like, $150,000 car. We had clients that bought the $150,000 plaid price, and when they dropped these things down substantially and I got to keep my full self driving, I was like, man, this is. This will be a great deal.

Now, what I didn't. They got me in the wash on the trade in on the y, but still, I like the x a lot. It feels a little more comfortable. Cause my complaint with my y, and I think they fixed this. Cause they put air suspension on.

It was. It's just so stiff. You go over a railroad track, and you filled in your teeth. Now, the question I think this next goes to is, what about the Cybertruck? How's your Cybertruck treating, you know, in.

Bo Hanson
The woods and maybe in other parts of the country, you're seeing them all over, but we're starting to kind of see them in our neck of the woods now. So I don't know how early, but I got offered to build the Cybertruck, one of the founder series. It was probably two or three months ago, so I could have gotten one of these things pretty early, but I just had this gut feeling that I should hold off. And I don't mind verbalizing what my thoughts were, is that it's just such an odd looking vehicle, and it's not completely practical for me because it won't fit completely in my garage. So that was gonna be some logistical things.

Brian Preston
My wife doesn't think it's exactly the best looking vehicle ever, and that means a lot to me, because I'm still trying to make my wife. That means a whole lot. I want to look cool in front of my wife, you know? So it's. It's one of those things.

And then I had this realization when I started seeing them around town, I was like, I really like this vehicle. And I'm sure everybody who's driving right in this moment in time, this would be the coolest vehicle I could own because it would get a lot of head fact, you know, head turning factor. But I'm just worried a year from now, because I know where we live, there are going to be. These things are going to look like Honda accords around all over the place. And then I was like, is this going to be the PT cruiser?

And I didn't come up with that. I read that in an article somewhere. Is this going to be the PT cruiser of 2024? Meaning that it comes out with a lot of fanfare, but then it struggles. And that breaks my heart to say that out loud, but that's why I've decided not to do the Cybertruck.

And instead, as a consolation prize, I bought a diecast cybertruck and put it on the show. Because, I mean, it is an iconic thing. I just don't know if I need it. The way you smiled when you unboxed that mini cybertruck. Oh, he's so happy.

Like I said, if I owned the Cybertruck right now, I think I would be super happy and excited. I did. Because the. The unique factor, I just don't know how well that ages over the next year to two years. I don't disagree.

Unknown Speaker
It's probably true. And I could be wrong. I hope I'm wrong. I really do. But that's.

Brian Preston
That's where. So I've told my wife, I was like, I could see me driving this, this x for the next ten to twelve years. I really enjoy this car. There you go. Full cybertruck Tesla update from Brian.

A question that should have taken 26 seconds into a five. And I did kind of think, like, oh, maybe this one will be a quick one. Sorry, I shouldn't have thought some highlights. Yeah. By the way, he go to moneyguy.com book tour.

You can see this in person. I've realized, doing all the press for this book tour, that I am a marathon runner. I'm not a sprinter because I go on to all these tv shows. And afterwards I have, like, six things I wish I'd have said. I'm so frustrated with.

I'm just not a sound bite type guy. But if you. If you give me 2030 minutes, I'm gonna give you some dingers in there. I'm gonna give you something that just. That really works.

But if you give me three minutes, Lord, help your show. You know, that's the problem. So I've just learned a lot doing the press. This was a great exercise. You're flexing a new muscle.

I'm a sprinter. I'm not Usain bolt. I'm more of whoever the most famous marathon runner is, which I have no idea who that is now. I don't know the name of the most famous marathon ever. And his bolt even popular anymore.

He's probably, like, now retired, and he was real fast. Is he still running? I don't think he's still running. He's a really well known spinner. Yeah.

Unknown Speaker
Okay. Would you like another financial question? Sure. I don't know. Do we get more of those types of questions?

So this one is about cars, too. It says, hi, my car recently died on me, and I needed to get a new one. I'm 22, and I have $13,000 in my emergency fund. Should I pull eight to ten k from this emergency fund to buy a car in cash, or is now the time to use 23? Eight?

What do you think? All right, what was. Give me a name for this person. Tevin. Tevin.

Bo Hanson
All right, so, Tevin, I'm gonna give you the quick disclaimer. We can't give you specific investment advice because we don't know all the unique circumstances surrounding your situation. And I love that you gave us some really good information. You're 22 years old. You have a $13,000 emergency fund.

But what we don't know that we would really need to know is that $13,000 emergency fund, how far does that cover you? Is $13,000. Is that just like, three months of living expenses when you factor in rent or mortgage and groceries and auto payment, insurance and all the stuff that you have going on, or do you live super lean? Is $13,000 like, 6810 months of expenses? We don't know the answer to that question.

It's gonna be difficult to tell you specifically how lean you want your emergency fund to be. I will tell you this one. I empathize with you because being, like, 22 and being young and having a car go out just sucks. It's like, the worst. Like, you're at the very beginning of your financial journey, in the very beginning of, like, your quote unquote, adulthood life, and then you just get, like, you hit right in the teeth with a car trouble issue.

That stinks. But I love that what you're thinking about is, how can I do this the best way? How can I navigate this in a responsible way so that my future self won't look back and regret the decision that I made. I love that. Now, I do think, Brian, one of the reasons that you came up with 23 eight, one of the reasons that was even a thing that was developed is so that we could have reliable transportation.

And in my mind, Tevin situation sounds like a reliable transportation type situation. Yeah, I mean, I would. By the way, moneyguy.com resources. Go check out the financial order of operations. Also, full deep dive on what I'm about to share in millionaire mission.

Brian Preston
So go check that out, too. But he gave us a lot of great details, and like, we can't give you specifics because we don't know all your details, but I'll just walk through this like it was a case study. You know, if you look at step one, highest deductible covered, that's where you probably, I think that you're going to have more than enough with $13,000 to cover your highest deductible. If you look at employer match, you know, go compare that to whatever your day job is to see where you are. Because if you're getting 50% to 100% rate of return offered by your employer, don't pass that up.

So then we get a step three, high interest debt. Now, here's the variable. We don't know what's the car loan rates because, by the way, car loans in the past were sub 5%, but maybe they are if they're subsidized by the manufacturer or the bank or the institution that's selling you the used car. But sometimes credit unions have great rates. But I didn't realize until somebody was sharing with me that car loans, now they can be around 15%.

And I was like, holy cow, are people really financing cars at 15%? I would look at high interest debt and you ought to have a question for us and say, what is high interest debt? And for somebody, it depends on your age, in their twenties. To me, historically, if you look at risk premiums, safer, you know, the safe rate of return, historic. Now, it's not right now because you can get 5% on your cash right now, but historically, it's probably for somebody in their twenties, you'd want to put something around 6%.

So I would look at your car loans and say, okay, if it's less than 6%, 23 eight is going to be your friend. Still put down that 20% on a good, reliable used car, but finance it over for three years. However, if that rate is greater than 6%, I mean, I think you have to hold your nose and unfortunately pay cash. Try to find something very affordable. So long as the emergency fund doesn't get too lame.

Bo Hanson
So long as that you gotta make. Sure you don't get below deductibles covered. Their highest deductible covered. That's what I would use as the cause. You gotta have a good, reliable car.

Brian Preston
So that's gonna require something. But then, yes. I want you to keep going through the financial order of operations so that if it was an affordable rate, you can then make sure you're not extinguishing your emergency reserves. And then get into your roth and your employer's plan. There's all kind of opportunities.

That's why we tried to design the financial order of operations to be an all terrain, all weather type of system or tool, so you can maximize your journey. The only other thing that I would add on to there is. I don't know what it means when you say your car died. I'd be curious to know. Okay, is my car died?

Bo Hanson
The battery went dead. Cause, you know, going to buy a new battery is less expensive than buying a new car. If this is a $500, 600 repair, and that repair will get you some more longevity out of the car, you ought to at least investigate that. Now, if it comes to where you have to throw a lot of money at this car that's not worth a whole lot of money, then sure. But make sure you don't just rule that out.

Just because a car is old and just because a car might need a little TLC does not mean that it's immediately time to throw that car out and move on to a new one. So I would certainly go down that path to understand exactly what all of your different options are. Yeah. Awesome. Blew the engine, though.

You're probably gonna have hard time putting a new engine there for a couple hundred bucks. It's true. Good luck with that decision, Tevin. I hope that that really helped you out, and we appreciate you being here. The money.

Unknown Speaker
Brick road has a question for you. It says they're 33 years old with a 30% plus marginal tax rate. They're maxing their four hundred one k and HSA. I'm splitting my 401K contributions 50 50 with Roth and traditional to get some tax break. Now, am I offsides with the Foo?

Bo Hanson
I don't want to say offsides. That's too. It's too aggressive, it's too strong. I will tell you our opinion, and this one I do put opinion on, because we're making some assumptions here about tax rate today, tax rate in the future, that sort of thing. Our opinion is what I keep hitting the microphone.

If I were you, our opinion is, once your marginal state and federal, state and federal rate combined are over 30%, our opinion is historically that current year tax savings is pretty attractive. If I can put a dollar in my four hundred one k and I can save $0.30 in taxes, I can think of that this year kind of as like a 30% imputed rate of return. That sounds pretty exciting. And if I build up my wealth well, and I build up the three buckets, I feel pretty confident that when I get to financial independence, if I can pull from different pots, I can probably get my tax rate below 30%. Right?

So if I'm going to have a higher tax rate now, lower tax rate in the future, I think pre tax makes a whole lot of sense now. Maybe you're someone who says, hey, my tax rate's never going to change, it's always going to be 30%, or my tax rate is only going to be higher and it's going to be higher for the rest of my life because I believe XYZ, well, then I think you can make a case for doing raw 401k. But in ideal world, here's what we love to see. And Brian, I want to see if you agree with this. We love for you to max out the 401k, do it all on pre tax, get all that tax savings.

And even though likely in the 30% bracket, you can't make direct contributions to Roth anymore, there's still likely an opportunity for you to do backdoor Roths where you could still do up to $14,000 for you and your spouse in Roth contributions every year. So that way it's not an either or, it's a both. And. And you're still maximizing the current year tax benefit. Yeah, I mean, it is.

Brian Preston
There is some truth to the fact that funding Roth contributions, especially like 401 ks and things like that, since you don't get a current year tax deduction, it costs more money. It takes more money. So if you do pivot to, because you're in a higher tax bracket situation to pre tax, in theory, you should have now more take home pay that you could either do that backdoor Roth contribution, you can start saving into an after tax individual or joint brokerage account. Just make sure that the money is doing something. Also, I think a lot of people who are financial mutants, there's definitely a sect where you're kind of.

It's hard to make a decision on something because I even, I do the 401 ks here at work. And I see the, I have a few people here, and so that they do some Roth contributions, they do some traditional. And I'm like, what are they, what are they doing here? I mean, you know, it's kind of like, you know, I'm going to do it both ways. So that way I don't, you know, offend anything or get anything wrong.

So you kind of have your feet in both camps. I would really encourage you to kind of figure out a system that you agree with and just go all in on it. Knew about a whole hog, I was going to say. So you go to go to go to moneyguy.com resources, check out our financial order of operations. There is a why to, why we put these specific steps and in the order that they are is because we are trying to help you maximize the tax savings, but also the timing, the behaviors.

And that's what I loved about. And look, I know I've said it a few times today, but it's important. This is why I wrote this millionaire mission gives you the mindset stuff even more. So I love that we give you the analytics with the financial order operations, but if you want to kind of get at the intersection of also the mindset stuff, this is going to help you so you can break those habits of kind of being in the middle, you know, not going whole hog on anything. You're just trying to kind of check all the boxes.

And there's nothing wrong with that because in a lot of ways, I mean, I do the same thing with my mortgage. You've told me, hey, yeah. Why aren't you investing that money? Because the ability to pay off that mortgage is better than, you know, just paying it off when it's two and a half percent. But I've been rounding it up.

You know, I've been paying a little bit extra, of course, but, but the reality is, is that if you follow the system and you do it right, you're going to probably be in a more maximized or better thing. But there's nothing wrong with focusing on not only to get wealthy behaviors, but stay wealthy as long as you're at that place. He said that he's only 30, he's 33 years old. That's definitely solidly in the get wealthy camp. So make sure you kind of know the whys for why we've designed this rule so it can maximize your journey and get you to doing the stay wealthy behaviors that much sooner.

Bo Hanson
I love what you just said, the behavior, you're nailing it. I can't think of one client ever who's been like, oh man, I was going to be financially independent if I only would have done pre tax contributions or oh man, I would have been financially independent if I would have been doing no, they're not bad. These are matters of optimization, is what they are. The fact that you're doing the behavior of saving and saving aggressively and doing your four hundred one k and doing your HSA, you're doing the right thing. It's just got to figure out what in your world is the optimal solution.

D
The money Guy show is hosted by Brian Preston. Abound Wealth Management is a registered investment advisory firm regulated by the securities and Exchange Commission in accordance and compliance with the securities laws and regulations. Abound wealth management does not render or offer to render personalized investment or tax advice through the money guy show. The information provided is for informational purposes only and does not constitute financial tax, investment or legal advice.