My Bucket List
My idea of a Bucket List may not be what you are thinking. Sure, it’s fun to have a Bucket List of activities and experiences we want to achieve before we leave this earth. But the Bucket List I’m referring to is the Buckets that we keep our money in. I learned a long time ago that the IRS treats your various “Buckets” of money differently.
Once you reach FIRE status and have chosen to “Retire Early”, you have to consider which buckets you can “stuff” your money in. As an example, when you no longer have a job or business income, your ability to “stuff” your money into some buckets, such as retirement accounts such as IRA’s or 401k’s, is lost. Or is it?
I look at the options we have with how to invest or otherwise manage our money, as various buckets, or perhaps “shells” of a shell game. Since the IRS treats these buckets in different ways, we have to adjust our strategy depending on where we happen to be in our financial journey. Once you’ve lost your “Earned Income”, these adjustments are critical to continuing to grow wealth.
Once you no longer have “Earned Income”, one of the buckets that may be available to you and your family is the Health Savings Account (HSA). The IRS allows anyone who has access to a high deductible health plan to contribute to a HSA. I’ve written about the beautiful benefits of a HSA in a past post, referenced here: https://beingfiredup.com/?p=2461
Contributions to the HSA do not require Earned Income, so this option is available to anyone who has a high deductible health plan. A bonus is that it reduces your Adjusted Gross Income. By simply changing the “bucket” this money is held in creates a huge benefit. Not only do you never pay taxes on the income or subsequent earnings, but it is accumulated wealth that is never taxed. This bucket of money can be used for medical costs. However, at age 65 when you qualify for Medicare, you can withdraw your HSA funds for non-qualified expenses at any time, although they are subject to regular income tax. You can avoid paying taxes by continuing the use the funds for qualified medical expenses.
Once you reach FIRE status, you may no longer have “Earned Income” which may eliminate our ability to contribute to retirement accounts (which reduces your Adjusted Gross Income), but you may find yourself in a substantially lower tax bracket. The new tax laws, set to expire in 2024 offer a “chance of a lifetime” opportunity.
In our household, the bulk of our wealth was accumulated while in the 25% and higher tax brackets. Now that we are retired, we have tremendous control over the tax brackets we fall into, taking advantage of transferring wealth from one bucket to another while in very low tax brackets. This allows us to systematically roll over retirement funds from Traditional accounts to Roth accounts, never paying taxes again on the earnings gained from these funds.
Consider that “income” based on long term dividends fall into the the 0% or 15% tax bracket depending on your Adjusted Gross Income likely much lower than the historic tax brackets related to Earned Income. However, if these dividends are accumulated in a traditional retirement account, you don’t pay taxes on these dividends until the funds are withdrawn from the Traditional account. Further consider, the potential to roll over these funds (switch buckets) to Roth accounts shielding these funds from taxes, forever…. And, being retired, you may only be in the 10% or 12% tax brackets, a dramatic reduction to when you had “Earned Income” and fell into much higher tax brackets, especially under past tax laws. Additionally, the standard deduction has nearly doubled with the new tax law, further shielding some income from income taxes. With this high degree of control over your annual income, it is possible to do these conversions in a “metered” fashion to dramatically control your tax exposure.
529 College Savings Accounts
Earnings from savings in 529 College Savings accounts grows tax free. By contributing Earned or “unearned” income from our regular savings then transferring (changing buckets) these funds from our regular savings we create an avenue to continue to grow wealth, tax free, while ensuring the college education of those we love, for current and future generations.
As one door closes, we adjust to open other doors to continue building wealth. Please share your Bucket List plans for this Holiday Season.
To your FIRE future.