Good Afternoon Everyone!
In the past, my wife and I have done quite well with regards to our taxes at the end of the year. I do not think either of us have ever had to pay taxes at the end of the year. Well, this year is no different. We will be getting a refund. However, you can hardly call the refund something to write home about. The reasoning for this is because we now make too much money... definitely not a bad thing! We have hit the next tax bracket, do not have any other deductions to take however, we are not maximizing our potential tax savings like we should be.
So this year, it finally hit me! We need to start maximizing our tax-free accounts as much as possible to reduce our tax burden.
I know, I know, a lot of you readers out there are saying to me, "I told you so". Well you are correct, and I am now seeing the forest between the trees.
I have always put money into my 401K to receive the employer match however I have not put in anything above that. I always wanted as much take home money as possible. The reasoning for this is because of my parents. I saw them go from blue collar, to king of the hill to paycheck to paycheck but that is a story for another day. Watching them, I always wanted a good cash buffer in case I ever lost my job. As my expenses increased (house, cars, vacations, etc) the cash buffer I needed continue to grow. Well, my wife and I have hit level of buffer I consider reasonable for our life. If we were both to lose our jobs tomorrow, we could sell all of our stocks and use money from savings to pay off our house, cars, etc and work a minimum wage job to sustain our current lifestyle.
With that being said, I have made the following adjustments to our financial landscape:
I raised my HSA savings to the maximum: $3,350 from $2,500 - difference of $850
I raised my 401K contributions from 6% to 10% - difference of 4%
I stopped automatically DRIP'ing back into the companies who pay the dividend.
My wife is contributing 4% into her 401K. Gain of 4%.
Reduced monthly contributions to taxable accounts.
With these adjustments I feel very comfortable with the way our finances are shaping up. The extra deductions from the HSA, and 401K's should offset our tax liabilities at the end of the year. Since I have reduced our monthly contributions to our taxable accounts, I am now "pooling" all the dividends received so there is limited net loss of contributions to our monthly taxable accounts. I will still be able to make roughly the same amount of purchases with roughly the same amount of capital as in previous years. The benefit of compound growth!
I am still not quite willing to go full out with maximizing taxable accounts because of potential future commitments. One of which becoming a parent. My wife and I have started trying and are hopeful that things work out! We are still in the middle of a basement renovation and we actively look for vacations to go on. I believe with the adjustments we have just made, we will still be in the black come next March.
Should either of us receive a nice raise this year, we might have to revisit these numbers but for now, I think we will just see how things shape up over this next year. I also think that towards the end of this year we might open up two IRA's and max those out.
What do you all think? What do you do?
Thanks for reading,