.png)
Once you have an emergency fund in the bank, and have become debt-free, now you can start to invest your additional income and grow your wealth. There is an endless amount of information and strategies around investing on the internet. For the purpose of this article we will focus on different types of investment accounts, their benefits, eligibility requirements, and limitations. We will not be giving any direct investment advice or tips.
HSA (Health Savings Account)
The HSA is a tax beneficial investment account that can be used to pay for healthcare costs. It is often considered to be a "holy grail" amongst the Financial Independence community because of it's triple tax advantages.
You can set money aside on a pre-tax basis.
The money in the account can then be invested and grow tax-free.
Withdrawals are tax-free when used for qualifying medical expenses.
In order to be eligible to contribute to an HSA, you must first carry a qualifying High Deductible Health Plan (HDHP). These plans typically only cover routine preventative care before the deductible. Therefore, it's wise to weigh out the benefits of an HSA compared to paying a higher deductible. For those with very low or no regular medical costs, a HDHP and HSA can be a great way to save and invest for future expenses.
As with many tax advantaged accounts, the HSA has a maximum contribution limit. As of 2022, the maximum annual contribution is $3,650 for individuals, and $7,300 for families. For anyone 55 and older, you can contribute an additional $1,000/year to your HSA.
The HSA account has some other great benefits in addition to decreasing your tax liability. The account can be used to refund yourself for past medical charges. This means if you have an HSA invested, and undergo a medical procedure you can choose when to pull the funds out of your account. If you don't want to use the account for a current medical expense, you can pay for the procedure out of pocket, let the HSA continue to grow, and pull the money out years later, tax-free, to reimburse yourself anytime you want afterwards, as long as you have the medical bill receipts.
Once you reach age 65, your HSA will then operate like a traditional retirement account. There will be no penalties for withdrawing the money, and you can use it for retirement income. One of the best HSAs we have found is available is through Fidelity. They don't charge any account opening or administration fees. Their platform is incredibly user friendly and they have an endless amount of low to no-cost index funds you can choose from.
IRA (Individual Retirement Account)
There are two types of IRAs that the majority of travelers will qualify for: Traditional IRA and Roth IRA. Each one of these account types have their own specific benefits and requirements. As of 2022 they both have a maximum contribution limit of $6,000 per year (you can contribute an additional $1,000 if over the age of 50). But that is basically where their similarities end. The primary differences between the accounts are found in their potential tax benefits.
Traditional IRA | Roth IRA |
Tax-free contributions | Post-tax contributions |
Growth will be taxed upon withdrawal | Tax-free growth |
Withdrawals are taxed as income | Tax-free withdrawals after age 59.5 |
Maximum contribution is $6,000/year regardless of annual income | Maximum contribution varies depending on annual income. Click here to check the contribution limits for varying incomes. |
The main point is that each account type can improve your tax situation depending on your current income and expected income after you stop working. Simply put, traditional IRAs are usually best for people who expect to be in the same or lower tax bracket when they start their withdrawals. Roth IRAs are ideal for people who expect to be in a higher tax bracket when they start taking withdrawals.
Considering travelers might have lower taxable hourly rates while working in areas with higher stipends the Roth IRA may be the most advantageous in this situation. If you take a higher taxable rate, then opening a traditional IRA might be best for you.
Brokerage Accounts
Once you've completely funded your 401k, HSA, and IRA you might want to continue investing even further in your future. This is where a brokerage account comes in to play. This is a simple investment account that doesn't carry immediate tax benefits. The money you deposit is after-tax and the gains you make from the account are subjected to taxation once you withdraw them. This account has no income or upper age requirements. You can contribute as much to this account and invest in any fund your brokerage has available. A large majority of the financial independence community prefers to invest with Vanguard due to their low cost index funds and minimal management fees.
Brokerage accounts are a great place to buy and hold securities for wealth accumulation and preservation. You have the freedom to pick shares of the companies you believe in and own a small portion of that company. As the company grows in value, so does your account.
Automated investing
For some travelers, the idea of opening and funding an investment account may seem daunting enough. Once you get into choosing which securities to invest in, you may want to pull your hair out. Luckily there are robo-advisors that can take the guess work out of choosing what stocks to invest in. Companies like Wealthfront and Betterment use strategic algorithms to invest your money in a way that coincides with your financial goals and risk tolerance.
These programs actively manage when to buy and sell shares, so you don't have to. You simply start an account, answer a few questions about your goals, then start funding the account regularly. You also have the option to schedule recurring deposits so you can invest without thinking about it. You can hold the money in the account to grow as long as you like and can withdraw the money without penalties whenever you need it.
Save for the future
With the additional money that travelers make, it should be a priority to allocate some into investments for your future. The order of priority should be as follows:
Fund your 401k up to your agency's match
Max out you HSA if you have one
Max out your IRA
Max out your 401k
Invest the remainder in your brokerage account
Most of these accounts are designed to help you save for your future. By starting your investments today and consistently contributing while you have tremendous earning power, you will reap the benefits in years to come. Set yourself up for success by investing early and often.
تعليقات