Lifepoint Financial Design – LifePoint Financial Services – Mike Metzger Financial Planning

For my clients and friends who are high-income earners, much of the ability to save on taxes has been taken away through phase-outs. So, with much of their income being subject to taxation, finding ways to save for the future is as necessity. But with so many different types of investment savings accounts, which ones should take precedence over others when contributing to all account options is not possible?

When prioritizing account types, it’s easiest to categorize them in order of which accounts provide the most tax incentive. By looking at their tax preferences, we can break down the most valuable investment savings accounts into three categories. Look to maximize the first category first and move down the list as your extra cash flow provides.

Three categories of tax-favored savings accounts:

1.     Triple-Tax Free: Triple-tax free refers to how each stage of the process of an investment account is treated. This means tax-deductible contributions, tax-deferred growth, and tax-free distributions from the account. So, every stage of the account (Funding, growing, withdrawing) does not incur taxation. We will get into the specific account type in a bit.

2.     Double-Tax Preference: Double-tax preferred means that any two stages of the account process (funding, growing, withdrawing) are treated tax-preferred. It might be that an account receives a tax deduction on the funding and tax-deferral in the growth, or just tax-deferral on the growth and tax-free withdrawals.

3. Single-Tax preference: As you might think, only one stage of the process is tax-preferred. Typically, this is seen with only tax-deferral during the growth stage.

Triple Tax- Free

Health Savings Account (HSA)

An HSA is an account that is triple tax-free. Meaning, that contributions going in are tax deductible on your tax return, the account can potentially grow tax-free, and qualified withdrawals for medical expenses are tax-free. It really is a thing of beauty!

The catch is that you must participate in a high-deductible health insurance plan (HDHP). However, as a high-income earner, you should already be participating in a HDHP as you would have cash on hand to meet the deductibles. To qualify as a high-deductible plan, deductibles in 2020 are $1400/year for individuals and $2800/year for families.

The savings may seem small or insignificant to some high-earners with contributions limits of $3550/year for individuals and $7100/year for families (additional $1000/year catch for those 55 years of age and up). However, keep in mind that even though you have high income to pay those expenses now, you will really need medical funds when you retire. Everyone knows that as you age, your medical expenses tend to go up. So, think of your HSA as a long-term retirement plan to cover your future costs.

I cannot express how important a Health Savings Account is.

Double Tax-Preferred

Tax-Preferred Retirement Accounts (401k, IRAs, 403(b), 457, etc.), Deferred Compensation Plans, and 529 College Savings Plans

The next best place to set aside funds are in tax-preferred retirement accounts up to their maximum allowed. Retirement accounts all have different contribution levels and features, so it is important to find the right retirement plans for you. With ROTH accounts (401(k), IRA) the contribution is not tax deductible (meaning after-tax), but the potential growth is tax-deferred and the withdrawals after meeting specific criteria are tax-free. However, with traditional retirement accounts the contribution is tax-deductible, the potential growth is tax-deferred, but qualified withdrawals are taxed at ordinary income tax rates.

The 529 College Savings Plan is the single best way to help save for a young child’s future college education. Typically, if your child is below the age of 10, a college savings plan is a tax-friendly savings vehicle. Although contributions are not tax-deductible, the potential growth of investments inside of the account is tax-deferred and withdrawals for qualified college expenses are tax-free.

Single-Tax Preferred

Annuities and Cash-Value Life Insurance

After the triple-tax free and double tax-preferred accounts have been maximized, it may be prudent to look at single tax-preferred accounts. I’m not the strongest proponent of annuities, however when maximizing the above accounts first and additional savings is needed, the tax-deferral offered in annuities should not be ignored.

Today there are low-cost investment only annuity options that do not come with all the expensive upgraded bells and whistles. The investment-only options allow you to have a standard investment portfolio that can potentially grow tax-deferred until withdrawal.

Taxable Brokerage Accounts

As the name suggests, a taxable brokerage account is taxable. However, if the funds placed in that account are for the purpose of long-term growth, you don’t pay taxes on the growth of those funds until they are sold. At that time the growth, if held longer than 12 months, is taxed at favorable long-term capital gains rates.

Earning a significant amount of income is great, but it’s important to not to let those dollars erode to unnecessary taxation. You also want to make sure you are putting yourself in a comfortable position for when that income decreases or ceases to exist altogether. Let this article be a guide in determining where to set your funds aside in your journey towards a better financial future.

If you have a more specific scenario that you would like to run past us, don’t hesitate to call or email


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly

All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.

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