As I was reminded repeatedly by TurboTax’s 2023 ad campaign called “Don’t Do Your Taxes,” most people would rather scale an icy mountain than file their taxes.

While I absolutely used to feel that way, too, I’ve come to love tax season as a time for reflecting on my financial progress, collecting forms like rare Pokémon, and poking around my tax software of choice, TaxAct (not a sponsor, but you should be!), for deductions I didn’t realize I qualified for. (The part where the software tells me I owe tens of thousands of dollars is my least favorite part, but it’s decidedly fun up until that point!)

So, we’re discussing three ways to lower your tax bill that I’ll highlight below, but I also wanted to cover a few bizarre forms you may encounter when you begin dabbling in the world of deductible contributions to qualified retirement plans. (This won’t be exhaustive, but they’re items Henah or I have personally come across after implementing our own strategies.) It can be scary the first time you hit a speed bump in the tax software that’s like, “Yo, you may have screwed this up!” 

Now, depending on how you earn and your access to retirement accounts and certain healthcare plans, it’s possible that all three of the options we cover today will be viable for you, but they all have one thing in common: 

They’re all legal ways to hold on to more of your income, instead of forking it over.

Crucially, these vehicles allow contributions made this year—in 2025—to be characterized as though they were made last year, in 2024. And at the risk of stating the painfully obvious: To take advantage of this, you have to have the cash available to invest. 

Which tax year should you select when making contributions in 2025 for 2024?

When you’re contributing to these investment accounts, they’re going to ask you which contribution year you’re electing. If you’re trying to ease your 2024 tax burden, be sure to select 2024! If you choose 2025, it’ll apply the contribution to next year’s tax bill.

The Traditional IRA and a few related fun formz

If you (and your spouse, if you have one) are not covered by employer-sponsored retirement plans at work (read: a 401(k) or 403(b), most likely), you can each contribute up to $7,000 to your own Traditional IRAs for the 2024 tax season. 

That’s up to $14,000 you can wipe right off the top of your taxable income, if both partners contribute the full amount to their respective IRAs.

A minor point of clarification for couples with combined finances: These are intended to be individual retirement accounts, so there’s no such thing as a “joint” IRA.

How do I calculate the tax savings I’ll score from contributing to the Traditional IRA?

For example, if you and your spouse are in the 24% marginal tax bracket after other deductions and you both contribute the maximum allowed, that’s a joint tax savings of approximately $3,360 (a calculation we arrive at by multiplying our contribution, $14,000, by our marginal tax rate, 24%). 

This means if you owed the IRS, say, $1,500, this one move would wipe out that tax liability, and probably generate a refund, too.

But here’s how your income may thwart your plan to deduct your contributions

Straight from the mouths of our boiz of the IRC, here are a few income limits and phaseout scenarios to be aware of for the 2024 tax season:

If you ARE covered by a workplace retirement plan…

• A single taxpayer (or head of household) begins to phase out of being able to take a deduction for their contribution when their MAGI (Modified Adjusted Gross Income) exceeds $77,000, and is totally ineligible for a deduction once they earn more than $87,000

• A married couple filing jointly begins to phase out of being able to deduct their contribution when their MAGI (We Three Kings, baby!) exceeds $123,000, and is totally ineligible for that sweet, sweet deduction once they earn more than $143,000 

If you are NOT covered by a workplace retirement plan, but your spouse is…

• A married couple filing jointly, where you are not covered by a workplace plan (but your spouse is!) begins to phase out at a MAGI of $230,000 and is totally ineligible once MAGI exceeds $240,000

And if you’re married filing separately, good luck—you can’t earn more than $10,000. (I know, I don’t get it, either.)

When this won’t work

To put a finer point on this one, this can only be leveraged to the hilt if you both aren’t covered by retirement plans at work. 

Also note that you’re only allowed to contribute a maximum of $7,000 across your Traditional and Roth IRAs, so this won’t work if you’ve already contributed the maximum for 2024 (even if you were contributing to a Roth IRA, not a Traditional—but if you contributed, say, $3,000 to a Roth IRA, you’d have $4,000 left that’s fair game to contribute to either). 

Fortunately, if you are covered by a plan at work and not eligible to consider a deductible Traditional IRA contribution, you can still contribute up to $7,000 to a Roth IRA (with some income limitations; here’s a video about how to get around those), though that won’t lower your taxes this year. 

You can open a Traditional or Roth IRA at pretty much all major brokerage firms; I prefer roboadvisors for ease of use (think Betterment, M1 Finance, etc.), but if you choose to take the DIY route, remember to invest the cash you contribute. I know way too many smart people who opened an IRA, funded it, and never invested the cash, so it just sat there…for years…uninvested. We have an episode about indices to consider when you’re building a diversified portfolio.

If you make excess deductible contributions, you’ll get prompted with a message (in TaxAct, at least!) that looks like this.

This screen grab is from the 2022 tax season.

Notice how TaxAct tells you what your maximum allowable deductible contribution is—in this case, the couple’s income, $213,789, was above the upper limit for a couple where both spouses are covered by plans at work in 2022. 

Form 8606 (I promise it’s not too scary)

All you need to do is file Form 8606, declaring that—oopsie daisy—you were totally just kidding, Uncle Sam, and your contributions were actually non-deductible all along! 

That looks like this: 

In this example, one individual in the couple accidentally contributed $2,400 to a Traditional IRA without realizing they couldn’t deduct the contributions. By classifying the entire amount as nondeductible, they’ve dodged the penalty bullet.

A quick jargon interlude: “Deduct” or “deductible” effectively translates to “wipe the amount off your taxable income as though it never happened.” Deductible contributions to pre-tax accounts are what allow us to save income tax in the present year. In this case, the couple became ineligible during the course of the year to deduct their Traditional IRA contributions, so the contributions become “non-deductible.” I.e., they’re no longer allowed to take the tax deduction.

So while you can easily fix excess deductible contributions by classifying them as “non-deductible,” you still won’t be able to deduct them (but they’re still tax-sheltered investments for the future, so all is not lost!).

And while we’re on the topic of Traditional IRAs, let’s talk about the 1099-R…

If you rolled over a 401(k) into an IRA in 2024, you received a form called the 1099-R. It’s a form your investment firm sends you whenever you take a distribution from a retirement account (yes, even a legal, unpenalized, run-of-the-mill rollover distribution!).

When I first received one a few years ago, I was convinced I was on a Pentagon watch list and had royally f***ed something up, but not to fear—this is a relatively straightforward declaration as well. 

For example, in the TaxAct software, in the “Income” section, you’ll see an option for “Taxable IRA Distributions.” When you click on it, you’ll have the option to add a 1099-R. If you fill out the form exactly, it should include a few things:

• The amount you rolled over

• The “code” for the rollover 

• The taxable amount (if it was just a direct rollover that didn’t change tax status, it should say $0.00)

…and that’s about it. Regardless of your rollover amounts, filing your 1099-Rs shouldn’t impact your tax bill, but you’ll still want to make sure you report ’em. The IRS is ~super serious~ about transparency, you know?

Next up: The SEP IRA

If you have any self-employment income (read: 1099 income), this last-minute Hail Mary might be a godsend. Side hustle girlies, #rejoice.

A few things to note:

• If you have a business with full-time employees, the rules are a little different; you have to contribute to their SEP IRAs, too, so if that’s your situation, you probably have a business CPA who can guide this choice—but if you’re just a solopreneur or side hustler, this is probably a fairly uncomplicated option for you. 

• You can contribute to a SEP IRA even if you’re also covered by, say, a 401(k) at a W-2 employer, since they’re accounts funded by two different sources of income.

The TL;DR on the SEP IRA for solopreneurs is that you can contribute up to 20% of your net business income, up to a whopping $69,000 for 2024. 

If you want to calculate a super precise contribution for the biggest deduction possible, you can always pay a CPA to do it for you—but a tax pro I befriended (yep, I love me some tax nerds) taught me a cool trick to make this a little easier. 

Since you deduct your self-employment taxes of 15.3% in order to get your “true” net business income on which the contribution is based, you can simply multiply your “self-employment income after write-offs” by 20%, rather than 25% (which is what you’ll see elsewhere online as the upper limit). This will give you a rough estimate of how much you can contribute to your SEP IRA.

So if your business earned $15,000 and you’re writing off $3,000 for expenses, leaving you with $12,000 of net business income before other deductions, you’d multiply $12,000 by 20%: You can contribute around $2,400 to your SEP IRA. 

For those with a lot of side hustle or self-employment income, this deduction can be quite significant.

When this won’t work

This won’t work if (a) none of your income came from self-employment or side hustle-type sources or (b) you’ve already contributed the maximum to a Solo/Individual 401(k). For the uninitiated, a Solo 401(k) is just a 401(k) you can open for yourself and use as a self-employed person. 

SEP IRA vs. Solo 401(k)

For example, if I had a Solo 401(k) in 2024 and I already contributed 20% of my net business income to it as “employer contributions,” I can’t then double-dip and contribute 20% more to a SEP IRA, too. 

If you had a Solo 401(k) but didn’t fund it, you could finish funding the Solo 401(k) (with “employer” contributions) in 2024 for the 2024 tax year. That’s totally fair game, too—no SEP IRA required.

The reason the SEP IRA is a more viable option for retroactive tax minimization? You can’t open a Solo 401(k) in 2025 and fund it for 2024. The Solo 401(k) has to be opened by Dec. 31, 2024 to be eligible for 2024 contributions. That’s why the SEP IRA is such a baller tool—you could have started a business in 2024, made absolutely no moves to invest in pre-tax self-employment vehicles, and decide on April 13, 2025 that you want to open and fund one for 2024.

You can generally open SEP IRAs at all major brokerage firms without much fuss; roboadvisors typically offer them as well.

Beware of a SEP IRA if you do the Backdoor Roth IRA (and one way around it)

One watchout: If you’re currently someone who dabbles in the Backdoor Roth IRA strategy because you’re over the Roth IRA income limit, you’ll want to weigh your priorities before opening a SEP IRA, as a SEP IRA “counts” as a Traditional, pre-tax IRA and will make executing a Backdoor Roth IRA more complicated. 

Sometimes, people opt for Solo 401(k)s instead for this reason. But if you’re down for a complicated workaround, you can open both a SEP IRA and a Solo 401(k) in 2025, fund the SEP IRA for 2024, and then—after you’ve filed and tax season is over—roll that shit over into your Solo 401(k) such that you have $0 balance in the SEP IRA again. Problem solved. Backdoor Roth IRA commence! Just note your business needs to be incorporated with an EIN number to open a Solo 401(k).

How to ~declare~ these glorious deductible contributions

Under “Deductions,” you’ll see a line item for “Self-employed SEP, SIMPLE, qualified plans.” That’s where you’ll tell the software how much you contributed, and “ooh” and “aah” as your tax bill lowers accordingly. As you can see, in 2021, my SEP IRA/Solo 401(k) contributions saved me an absolute boatload (yacht-load? We are talking about a billionaire’s game, after all).

And finally, the HSA—the consolation prize for our late capitalist healthcare hellscape!

If you have a high-deductible health plan (as defined by the IRS), you may be eligible for an HSA plan. The contributions and growth will be tax-free forever if you use the money for qualified medical expenses, so it’s a great place to rack up hella capital gains.

For 2024, the minimum annual deductible to be considered a high-deductible plan for self-coverage only is $1,600, and for family coverage is $3,200. The contribution limits vary on HSA plans for the 2024 tax year: If your health insurance plan just covers you, the limit is $4,150, and if your plan covers your family, it’s $8,350 for 2024.

You may already have an HSA set up through your work, or you may need to open one yourself, but once you surpass a certain amount of cash in the account (typically somewhere in the $1,000 to $2,000 range, but it varies by plan), you’re usually able to invest the funds—something you’ll do within your HSA account portal. 

You’ll have to go to your HSA provider and make a direct contribution (as opposed to a payroll contribution) to contribute one big, fat lump sum, which is technically suboptimal because direct contributions aren’t exempt from FICA tax the same way payroll contributions are. The good news is, an HSA contribution made in 2025 can be retroactively tax-deductible for 2024.

Moving forward, consider making your 2025 contributions through payroll deductions, because then your contributions won’t be subjected to FICA tax, either! Woohoo! Another 7.65% saved.

Any after-market HSA contributions (read: not payroll deductions, but new manual contributions) you make in 2025 for 2024 will be captured in the “Deductions” section:

When this won’t work

If you’ve already contributed the maximum to your HSA in 2024, unfortunately, this retroactive move isn’t an option (those contributions will be noted on the W-2 that your employer sends you). This also won’t work if you have a low-deductible plan.

The HSA is one of the best tax vehicles out there, because it’s effectively a second Traditional IRA that’ll never be subjected to required minimum distributions. 

If you hang onto your HSA until you’re 65, it’ll basically “convert” to follow the same rules as a Traditional IRA, and you’ll be able to make withdrawals for whatever you want (not just health expenses) without paying a penalty. You’ll pay taxes on your withdrawals like you would with a Traditional IRA if you don’t spend them on health-related expenses, but that’s about it. 

Someone who’s not covered by a retirement plan at work, has side hustle income, and has a high-deductible health plan could theoretically use all three methods.

Talk about a triple tax whammy! (I hate myself.)

It’s worth restating: I’m not a licensed tax professional. Please consult your CPA and do your own research before making big money moves. Hopefully this serves as a starting point for your pre-tax investing game this tax season if you haven’t made any decisions yet!

How to do the Mega Backdoor Roth IRA

Ironically, the “Mega Backdoor Roth IRA” is not a Roth IRA at all: It’s technically an “after-tax” contribution to your employer-sponsored 401(k) or 403(b) plan, not to be confused with a Roth contribution, which is much more boring and akin to going through the “front door.” 

Unfortunately, not all 401(k) plans allow for after-tax contributions beyond the standard, employee elective deferral of the $23,500 contribution limit (of the four companies I’ve worked for, only two have allowed it). 

But in 2025, this strategy allows you to get another $46,500 of Roth dollars in the bank on top of your regular $23,500 contribution to a 401(k) or 403(b).

Bonus, albeit a potentially confusing one: You’re still in the clear to contribute $7,000 per year to a Roth IRA or Backdoor Roth IRA if you want to, as well. Your IRA activity is wholly separate from today’s discussion of juicing your employer plan for all it’s worth.

Why? Because the actual contribution limit for 401(k)s in 2025 is a whopping $70,000. 

Here’s how it works:

1. In your company’s retirement portal, you elect to contribute after-tax dollars above and beyond the $23,500 limit.

2. Your plan administrator then (a) converts them to Roth in-plan or (b) permits in-service distributions, allowing you to roll over the funds to a Roth IRA.

…and that’s about it. I pulled an old screenshot from a former employer’s contribution page so you can get a sense for what this might look like on the back end:

Since my base pay at the time was $128,000 and I wanted to contribute a pre-tax $22,500 as well as an after-tax $6,500 (I basically wanted to mirror a regular Roth IRA limit in 2023), my “percentages” were 17% and 5%, respectively. You’ll probably see some language around a “Roth In-Plan Conversion” that’ll ask if you want to “convert after-tax contributions” to Roth, and your answer is a resounding yes. 

Candidly, it might be more trouble than it’s worth if you have to manually roll over and convert the after-tax contributions every month, but if your plan converts them to Roth in-plan for you and you can afford it, it’s probably a no-brainer to get a few more tax-advantaged dollars working in your favor.

If you are faced with the manual-only option, some people like to wait until the end of the year to roll over a full year’s worth of their after-tax dollars to their Roth IRAs—but it’s worth noting you’ll pay additional tax at that point on the growth of those after-tax dollars at the point of conversion (assuming they grew, of course).

It’s also worth noting that your employer match counts toward the overall $70,000 limit. If you contribute $23,500 and your employer contributes $10,000 (#goals), your 401(k) bucket technically has $36,500 of “room” left ($70,000 – $23,500 – $10,000 = $36,500).

Importantly, there’s no income limit for this (yet!), so people who earn too much to contribute directly to a Roth IRA (or don’t want to bother with a regular Backdoor Roth IRA) may find this a more seamless way to get both pre-tax and after-tax/Roth exposure in one fell swoop. Now, to find a job with a tech company that offers this Mack Daddy benefit…

Should I get a high-deductible health plan just so I can have an HSA?

Well, maybe. As with all things financial, it depends—but there’s a framework that might help. (And it’s worth stating explicitly: This discussion assumes your only concern when picking a plan is financial. If you have specific health concerns or doctors you need to make sure you can see in-network, then your health will of course be the number one priority!) 

If you’ve got an employer who will pay for all your medical expenses with no deductibles or premiums (shout-out to my past employer, Meta; Zuck, you’re the realest for the totally free healthcare), then yeah…I’d probably take that deal 11 times out of 10.

But what if you’re presented with a smorgasbord of confusing options? A PDF packet so thick it makes your eyes water? Then what?

You might have a few choices—some with high deductibles, and others with low ones. “High-deductible” is defined by our #BoizAtTheIRS as any health plan with a deductible higher than $1,650 for a plan covering just you, and $3,300 for a plan covering your family.

Moreover, the maximum out-of-pocket costs for these plans are $8,300 for plans covering just you, and $16,600 (gulp) for family plans. 

I don’t know about you, but I’d do some pretty questionable shit for a deductible as low as $1,650. Mine is $2,500 for a plan that just covers me, and my guess is that many of you will have access to a high-deductible health plan. (If you’re like, “What in God’s green pastures is a deductible?”, read this post for a healthcare primer about premiums, deductibles, copays, and more.)

More often than not, a high-deductible plan will have lower monthly premiums than your alternate options. You can calculate your total maximum costs each year by adding up:

• 12 months of premium costs (i.e., what’s being taken out of your paycheck to pay for the plan). If your insurance costs $200 per month, you know you’ll pay at least $2,400 per year in premiums even if you never set foot into a doctor’s office.

• Your out-of-pocket maximum (which is a limit that’s higher than your deductible, because the insurance companies are excellent at coming up with convoluted ways to continue passing the buck to you after you hit your deductible). The silver lining is that it should represent the most you’d possibly be on the hook for in a given year. (Key word: should. If you spend on services that your plan doesn’t cover, that’s not included in this limit.)

Then, when you’re debating between the low-deductible plan and high-deductible plans, you can ask yourself at a high level:

• Do I want to pay more per month but (probably) have a lower deductible and out-of-pocket maximum?

• OR, would I rather pay less each month but (probably) risk it with the higher deductible and out-of-pocket maximum?

Making matters more complicated (yay!), sometimes these plans involve varying “copays” or “coinsurance” that can make the analysis a little trickier.

For example, Henah and I were comparing health plan options the other night and noticed this:

The plan on the far left, “Empire PPO 1000,” is a low-deductible plan that costs $200/month, but with paradoxically higher out-of-pocket maximums ($5,000 single/$10,000 family) than the high-deductible plan’s ($70/month) out-of-pocket maximums ($3,425 single/$6,850 family). Huh?! (Because the nomenclature might be confusing, it’s worth clarifying that—in the plans shown—all three technically operate as PPOs, or preferred provider organizations. It’s a common misconception that high-deductible plans can’t be PPOs, but they aren’t mutually exclusive.)

What gives? Aside from the fact that someone needs a PhD in data science to make sense of this chart, notice the “Primary Care Visit,” “Specialist Visit,” “Urgent Care,” and “Emergency Care” rows. The low-deductible plan has copays—meaning you’ll pay $20 a pop at your primary care doc, $40 at a specialist, $40 for urgent care, etc. for all in-network visits.

And as a fun reminder, those copays don’t count toward the plan’s deductible—but they do count toward your out-of-pocket maximum.

The higher deductible plan in this example? Forget about copays altogether. You’re paying for everything out of pocket until you hit that deductible, honey (after which the listed 0% coinsurance kicks in). Best of luck to you and your wallet! The good news, of course, is that the maximum (again, as long as you stay in-network) you’ll be on the hook for in a given year with that example plan is $3,425 (just you) or $6,850 (family) after you pay your premiums. You’re probably just more likely to hit that deductible than if you’re using a low-deductible plan with copays for routine visits. 

For example, if Henah—who has the low-deductible plan—goes to see an in-network primary care physician, she’ll pay a $20 copay. If I go to see a primary care physician with the high-deductible plan, I’ll pay whatever they charge for an office visit (usually in the ballpark of $150).

That said, every plan is different, but please enjoy our Slack conversation, which became a flurry of confusion and numbers. Here’s a snippet of our Friday afternoon party in the DMs, where we panic-calculated cost-benefit analysis: 

As you can see, the cost calculation in this example is:

• High-deductible plan for an individual: $70/month + a $3,425 out-of-pocket maximum per year in costs (unless something major happens, you’re probably paying full price for everything out-of-pocket throughout the year) = Between $3,240 and $4,265 projected maximum cost

• Low-deductible plan for an individual: $200/month + a $5,000 out-of-pocket maximum per year in costs, but with copays that’ll likely cover routine stuff cheaply and a lower deductible ($1,000) you’d need to hit before insurance would begin kicking in and covering 70% of costs until you’ve spent $5,000 total = Between $3,400 and $7,400 projected maximum cost

This example illustrates why people often instruct those who are “young and healthy” or who have very few predictable health-related expenses to go for the higher deductible plan, assuming they won’t need to go to the doctor very often (or at all) and can use the insurance as protection against catastrophic health issues that would run up bills in the tens (if not hundreds) of thousands of dollars. Slowly gestures to the podcast episode about how backward the system is…

I digress.

But that’s not even close to where this analysis ends, because some high-deductible health plans have an ace up their sleeve, in the HSA.

The HSA can be a game-changer, thanks to the tax savings

Because you won’t pay any federal, state, or FICA taxes on payroll contributions to your HSA, you can pretty easily calculate the potential savings you’ll gain (read: money that stays in your pocket instead of being sent off to Uncle Sam for his next highway improvement project) based on how much you earn.

Assuming you’re able to invest the maximum amount in your HSA ($4,300/year for a health plan that covers just you, and $8,550/year for one that covers your entire family in 2025), your potential tax savings are #thicc. In case you’re like, “That seems like a lot of money, dude,” it’s roughly $165 per biweekly paycheck for the “single” coverage and $329 per paycheck for the “family” coverage. 

That still may sound like quite a bit, but I think of it like this: Would I rather pay more to an insurance company for a lower deductible, or pay less to them every month and pay myself more (in an HSA)? Depending on the difference in your monthly premiums and the shitty-to-decent gradient of your plan options, it may be pretty close.

Wondering how much you could stand to save in taxes from HSA contributions? I did the hard work for you; I took the marginal tax rate + 7.65% FICA tax to see how much you’d save on your annual tax bill:

• 10% bracket saves $759 on the singles plan, $1,509 on the family plan 

• 12% bracket saves $845 on the singles plan, $1,680 on the family plan 

• 22% bracket saves $1,275 on the singles plan, $2,535 on the family plan 

• 24% bracket saves $1,361 on the singles plan, $2,706 on the family plan 

• 32% bracket saves $1,705 on the singles plan, $3,390 on the family plan 

• 35% bracket saves $1,834 on the singles plan, $3,647 on the family plan 

• 37% bracket saves $1,920 on the singles plan, $3,818 on the family plan 

(If you’re not sure which tax bracket your taxable income falls into after accounting for deductions and such, you can check out the 2025 brackets here.)

For example, a family in the 24% bracket who contributes the full $8,550 each year will claw back $2,706 in tax savings, which can directly offset the costs of the insurance. Of course, it also means you have to be able to tie up that much money in your Health Savings Account, which isn’t always realistic.

This also doesn’t take state tax savings into account, which could add even more money back into your pocket; notably, California and New Jersey don’t recognize HSAs as pre-tax vehicles so you won’t save on state taxes in either of these places. Womp womp. Good thing taxes in those states are so low! Oh, wait…

Time to pull it all together for the grand finale.

The tax savings from investing in an HSA can help give the high-deductible plan an edge over the low-deductible plan

Let’s do a quick example to drive home the point and revisit our earlier options.

Things look pretty neck-and-neck, especially when I consider the fact that the low-deductible plan’s copays are likely to make each individual visit to the doctor very affordable (as opposed to being on the hook for $200 for a checkup wherein you accidentally ask one (1) specific question). 

• High-deductible plan has the potential to cost $840 in premiums + $2,500 deductible, or a combined $3,340 (with a worst case scenario of $4,265). We’ll assume it’s probably pretty likely I’ll be on the hook for at least the first $2,500 of my care in a given year.

• Low-deductible plan has the potential to cost $2,400 in premiums + $1,000 deductible, or a combined $3,400 (with a worst case scenario of $7,400). Thanks to the copays, though, we can assume I probably won’t be on the hook for routine care (beyond $20 or $40 here and there). 

But what if I’m in the 24% tax bracket, and I’m able to contribute the full $4,300 to an HSA that just covers me? That contribution gets added to the “assets” side of my balance sheet, increasing my net worth, and I save $1,361 on my federal tax bill, which means I’m “making” an additional $1,361 that year—lowering the net cost of paying for premiums and hitting the deductible in the high-deductible plan to $2,039 (again, we’re not counting the contribution to the HSA as a cost, since you’re keeping that money—it’s not as much a cost as a cash flow consideration).

Now, the difference between our two options is:

• High-deductible plan’s net cost to hit deductible: $2,039

• Low-deductible plan’s net cost to hit deductible: $3,400

So we’d save $1,361 over the other plan’s premiums and deductible—is that worth the hassle? Well, remember, it’s not just the up-front savings we’re considering: It’s the fact that these funds in your HSA are invested and will continue to grow tax-free over time, too. (As opposed to the low-deductible plan, where there’s no associated investment vehicle, just potentially lower up-front costs.)

Sometimes I feel like insurance plans are created by a bunch of MBAs in suits throwing darts at a spreadsheet, so it may not always work out this way—but this example is intended to illustrate the framework for determining how much the tax savings may offset the higher deductible of a high-deductible plan, based on your specific plan options.

Put another way: Depending on your tax bracket and single vs. family coverage (assuming you’ll contribute the maximum to your HSA), a high-deductible plan can cost more on the surface than a low-deductible plan, and still end up being net-cheaper.

As complicated as access to healthcare in the US is, if we can view these questions like math problems, it can help us make a decision

The reason choosing a health plan is complicated (aside from the obvious; see previous unintelligible charts) is because we often don’t know what type of medical expenses we’re going to incur ahead of time, making the choice process uncertain and stressful (USA! USA!). But by calculating the “absolutes” of maximum possible costs and factoring in our potential HSA tax savings, we can make a more informed decision. 

Or, we could move to Sweden. There’s always Sweden.

In that article, I made a rogue prediction for the bottom: the S&P 500 at 3,200 points. The math of how I arrived at this figure is unimportant, but it was the result of my attempt to “undo” quantitative easing’s effects on markets, since all the smartest Twits on FinTwit were confident that until we flushed the excess cash out, things were going to be overvalued. At the time the piece was published, the S&P 500 was at 3,966—which would’ve meant it had a pretty far way to fall for my premonition to come true.

It’s important to note at this point that my wheels-off efforts at cosplaying a human fortune cookie were solely for shiggles: I was dollar-cost averaging into the inferno the entire time, and trying to make the thrashing a little more entertaining.

Fortunately, I was wrong (and a bit too pessimistic). The real bottom happened on October 12, at 3,491. So while I didn’t accurately predict the bottom, it turns out our guest that week on The Money with Katie Show did.

A guest on The Money with Katie Show may have accurately called the bottom

On October 19, we released an episode with Liz Young, the head of investment strategy at SoFi. I was reading her interview this morning because I seemed to recall her delightfully common-sense (and oddly prescient!) explanation for the situation we’re in now, in 2023: The S&P 500 is up 16% YTD, as of today, July 3. Unemployment is still at an all-time low. Interest rates are in line with historical averages. Inflation peaked a year ago and continues to come down. As Jack Raines asked a couple weeks ago, did the Fed pull off the soft landing?

Nothing about the 2023 forecasts suggested we’d be riding high right now, and yet…here we are.

So what gives? Let’s ask Liz, from her October 2022 interview:

“The market is a forecasting mechanism. It’s forward-looking; it tries to predict what the economy will be 6–12 months from now. The market bottoms first, earnings bottom second, and the economy last.”

This reality—that the stock market and the economy are operating on different “timelines,” so to speak—triggers a flaw in human judgment that creates issues for regular-shmegular investors. I can’t tell you how many messages I received throughout the second half of 2022 that said something to the effect of, “Things are looking like they’re going to get worse. Is now a good time to hold off on investing more?” 

Of course, that’s the exact opposite of what those types of tumultuous times call for, but the collective amnesia that sweeps through brokerage accounts is enough to make even the most seasoned investor second-guess their plan. 

But Liz had some words of wisdom in that episode that now stick out to me as perhaps the best advice we’ve ever shared on the show:

“I have a feeling that we’re going to look back on this period and wish we had bought more.”

Had our listeners heeded her advice that day, they’d be up roughly 21% right now. 

I was afraid to air the comment

I distinctly remember the post-production process for this episode, because we had a conversation about whether or not to cut that line—could it be construed as financial advice? “I don’t know, man,” I remember thinking, “Shit is so bad right now. Is it irresponsible for us to release this in the event things just keep crashing? What if this time it’s different?”

After all, remember that the months leading up to the interview looked like this:

In the end, we decided to keep it, because we knew Liz was a professional and her sentiment was expressly about “feelings” as opposed to a hard-and-fast recommendation or directive.

But it gives you a sense for the vibes of the period.

The last 12 months have been a crash course in trusting the data instead of the vibes. As that annoying saying goes, “Facts don’t care about your feelings.”

That’s why this week’s episode of The Money with Katie Show is all about the classic investor folly that’s statistically most likely to cut your returns in half (and that’s no hyperbole). Give it a listen—because who knows? It just might prevent you from selling off at the most inopportune time.

Financial goals, sacrifice, and taking the steepest path up the mountain

If you take home $5,000 per month and your goal is to save $2,500 (a 50% save rate, for those keeping score) because a 50% save rate makes intuitive sense on your journey to financial independence, you’ll likely find yourself in situations where you’re forgoing small luxuries or experiences to stay under your self-imposed budget.

This is the point where I, as the self-proclaimed millennial money guru, tell you that a 50% is unquestionably a good thing. Discipline! Sacrifice! Focus!

But it begs the question: What’s the point of reaching financial independence? Is it to never work again and tap-dance out of the boardroom, middle fingers extended? Maybe—but you’re likely trying to achieve something else. Happiness.

Our biggest challenge is striking the balance of “sacrifice in the short term” and “happiness in the long term.” And when taken to its logical extreme with the best of intentions, it’s easy to assume this relationship is linear: The more I sacrifice now, the happier I’ll be in the future. 

But that’s not how the sacrifice/happiness lever works.

“It’s not the destination, it’s the journey!”

Research suggests humans overestimate how much incremental happiness they’ll feel from large changes, because we often return to our baselines after big, circumstance-altering shifts. That’s fancy scientific talk for the idea that your baseline level of happiness may not change as much as you think once you summit your personal financial mountaintop. 

So let’s run a thought experiment: Say I estimate that my life will get roughly 20% better when I hit financial independence. It won’t change everything, but it’ll change enough of the things that actively annoy me on a daily basis and give me a lot of time back. On a scale of 1–10, if I’m a baseline 7 every day now, I don’t think it’s outrageous to assume I’d be closer to a baseline 9 if all pressure to generate my income evaporated. 

So today, I want to measure just how much small sacrifices materially change the time it takes to reach a financial goal (in this case, financial independence).

You’re going to have to suspend disbelief with me for a moment and pretend that we could also assign a value to your Happiness Quotient (HQ) on any given day. For example, let’s pretend the mornings when you buy a fancy coffee and a scone from the shop down the street and start work a little later give you a 10% boost in HQ.

If we’re measuring happiness on the same set scale of 1–10, maybe this ritual takes you roughly from a 7 to an 8. 

Normally, I’d be the voice of reason in this scenario and remind you that purchasing pleasure is a slippery slope and it requires constant swiping to be satisfied and blah, blah, blah—but not today. Instead, we’re acknowledging that these little dopamine bumps are capable of making you just a little bit happier in your day-to-day life. 

So how much does a little #light hedonism slow us down?

I should clarify two things right now: Spending more will absolutely result in you having less money, or, at the very least, the same amount of money, but later. And that’s okay, because the point isn’t to accumulate as much money as possible (or even to be financially independent as quickly as possible), but to achieve the most total cumulative happiness.

Rather than taking the steepest, hardest path up the mountain, we’d want to find the most enjoyable one: the path where we get the most marginal utility for our sacrifice, but stop short of diminishing returns.

The framework and numbers

All right, #RichGirl. Let’s get hypothetical, shall we?

Using our earlier $5,000/mo. income and 50% savings rate, that means we’re allowing ourselves to spend $2,500 so we can invest $2,500 per month.

At that rate, our hypothetical rich girl would need $750,000 to be financially independent (ignoring inflation, raises, etc. to keep this point illustrative).

If she saves $2,500/mo., she’ll reach financial independence after about 15 years (assuming an average 8% real rate of return). That’s 15 years of sacrifice, assuming staying under her $2,500/mo. budget requires sacrifice to maintain.

How much extra money would she have to spend each month for some happiness units?

I’m going to use my own life as an example here and rack up some happiness charges that will make her life better.

• $100 every two weeks for cleaning services (~$200/mo.)

• $5 per day for a fun coffee, tea, or other #littletreat (~$150/mo.)

• $30 for one nice lunch out during the work week, every week (~$120/mo.)

Maybe her weekly lunches, daily special coffees, and cleaning services buy her an additional 10% of happiness. Nothing crazy, right? We’re not trying to change our entire lives, just give a 10% bump to our HQ.

In total, that’s $470 more per month for convenience and a little joy. Our hypothetical Rich Girl is spending roughly 19% more each month to enjoy these little luxuries, and therefore saving 19% less ($470 out of $2,500), because her save rate was 50% before. Now, her new save rate is 40%, because she’s only saving $2,030 per month instead of $2,500.

She needs 19% more, and she’s saving 19% less. So how much is her timeline thrown off?

Her goal number is directly impacted by how much she’s spending, of course. Now that she’s spending an extra $470 per month, her goal number goes up: Instead of $750,000, she now needs $891,000.

Now, she’d be financially independent after 18 years, instead of 15.

Would you rather have a “7” level of happiness for 15 years and then jump up to a “9”, or an “8” for 18 years before hitting “9”?

Here are a few questions to ask yourself:

• How much do I make each month now?

• How much do I spend? Do I honestly feel like I’m making sacrifices right now to spend less?

• When am I on track to hit FI right now? (You need to know your current invested assets, the amount you’re adding to them each month, and how much you spend per month * 300)

• What types of things would I want to intentionally add back into my day to bring more joy, and how much would they cost? Conversely, are there things that you’re spending money on regularly that aren’t raising your HQ? Can you redirect existing funds?

• How much more per month would I have to spend to achieve a 10% boost in happiness?

• How would that spending increase impact my timeline?

Try this out for yourself and see what it would cost to increase your happiness on the journey. You might find you’re taking a steeper path to reach a destination faster that isn’t all it’s cracked up to be…or you may realize your weekly pedicure doesn’t actually move your HQ, and you’d rather invest that money in reaching financial independence (or another, more meaningful goal; I’m looking at you, after-market Eras Tour tickets) just a little more quickly.

2024 Roth IRA income limits

Someone making six figures who also reads this blog is likely contributing the maximum to their Traditional 401(k), which means they’re probably claiming a deduction of $23,500 in 2025—which means they’d probably need to make closer to $188,500 single and $293,000 married in order to be totally phased out (because $293,000 married minus a $23,500 contribution for each partner is that upper $246,000 limit).

Why a Roth IRA is worth your time

Besides tax-free growth and withdrawals, the Roth IRA allows you to access the principal at any time before age 59.5 with no penalties (the growth on that principal is treated differently, though). 

Because of this easy-access feature, Roth IRAs are a super flexible investment vehicle for retirement (and even more flexible if you’re planning to be an early retiree, thanks to the whole “no penalties on your own contributions before you’re gray” thing). 

But what should you do if you’re unable to contribute to a Roth IRA because you make too much money? The Backdoor Roth IRA.

You should be able to pull this off without any tax penalties, but there’s one scenario to be aware of that might trigger a tax bill that I note at the end of the steps below. Make sure to read through to the end, because it will likely determine whether or not you choose to attempt this.

(You might also wonder if a taxable brokerage account is a better fit—and it might be, but think about the main similarity between a Roth IRA and a regular ol’ taxable investing account: You’re already using post-tax dollars. Where you may otherwise jump straight to taxable investing after your 401(k), this is a way to sock away $7,000 post-tax dollars in an account that’ll grow and be accessible tax-free forever.)

“Backdoor Roth IRA”: the TL;DR

In a Backdoor Roth IRA (the potential for sexual innuendos abound!), you create a Traditional IRA and make a non-deductible contribution (in other words, you’re using money you’ve already paid taxes on, which likely means it’s just the money sitting in your checking or savings account).

You’re probably like, “What’s the point of a Traditional IRA if the main benefit of the account doesn’t work for me?” But the ability to convert IRAs from Traditional to Roth is your bread and butter here. 

Here’s how it works:

1. Open a Traditional IRA account with your brokerage firm of choice. Open a Roth IRA with the same firm, if you don’t have one with them yet.

2. Fund the Traditional IRA to the 2024 IRA contribution limit (assuming that’s your plan for the year): $7,000. Leave the funds in the money market/cash balance; don’t invest it yet!

3. Wait a few days for the funds to settle.

4. Convert the cash to Roth (big brokerage firms know how to do this; if you need help, you can ask! There should literally be a button that says “Convert to Roth”). Because the funds aren’t invested yet, there will be no gains to pay taxes on. You already have a Roth IRA ready and waiting from Step #1.

5. Invest in the index funds of your choice within the Roth IRA with the funds you converted.

And…that’s it.

There’s just one small snafu to note, per my earlier comments about being able to access contributions at any time: When you convert funds to Roth in the Backdoor Roth IRA process, you now have to wait five years before you can access the principal (hopefully this is no showstopper for someone with their other financial ducks in a row).

When does this make sense?

If you meet the qualifications above and you’re feeling comfortable so far, I’d consult an accountant for one last gut-check, then give it a go. However, one thing to note from a tax optimization standpoint is that this process should probably come after you’re able to contribute the maximum to your 401(k) for the year. 

You can do them simultaneously, of course, but if you’re not getting the most tax-deferred bang for your buck at your income level, the Backdoor Roth IRA probably shouldn’t be priority #1, in my opinion.

When shouldn’t you do a Backdoor Roth IRA?

If you already have Traditional IRAs lying around like discarded Fiji water bottles (I assume you drink Fiji water because…well, you know), you’re going to be subject to this convoluted thing called the IRS pro rata rule, which will result in a tax bill. 

I spent about an hour reading IRS.gov articles about this rule, and now, all I’m (kind of) confident about is this: The breakdown between your existing pre- and post-tax dollars in your existing Traditional IRAs will determine the amount of your Roth conversion that’s taxable.

Yeah, I didn’t get that either. Let’s do an example.

If you already have $50,000 in a Traditional IRA that you created with deductible, pre-tax contributions (before you were a high roller) and you add another $7,000 post-tax with the intention of converting it to Roth, only about 11.5% of the total amount in your Traditional IRAs is post-tax ($6,555 of the $57,000).

As such, 11.5% of your Roth conversion will be tax-free—but you’ll be taxed on the other 88.5% of the conversion. If you’re in the 24% income bracket, you’d pay $1,570 in taxes on the conversion of post-tax dollars to Roth (the 88.5% of your conversion ($6,555) x 24%). 

TL;DR: Depending on how much money you’ve got in those other IRAs, your tax bracket, and how much you’re trying to roll over, this could create a hefty tax bill come April.

For that reason, I’d really only attempt this (on your own) if you do not have a big balance in a Traditional IRA already (including SEP IRAs, rollover IRAs, etc.—and to be super clear, your Traditional 401(k) doesn’t count!).

Jenny co-founded a community called “The Inclusive Traveler” with her friend and coworker, Kelsey Ibach, who began using a wheelchair at the age of 25 after a car accident with a drunk driver left her paralyzed from the waist down.

I invited them to join me for this week’s episode of The Money with Katie Show to share more about the hidden costs of living with a disability—from the challenges of traveling to planning for medical care in retirement. One in four people in the US will become disabled before they reach traditional retirement age. 

It’s a “minority” group that the majority of people (whether through genetic preconditions, an accident, or the process of aging) will join either permanently or temporarily at some point in their lives, yet it’s a topic that’s almost wholly absent from personal finance discourse. 

In her first year after the accident, Kelsey racked up nearly $100,000 in costs just to maintain her same, pre-accident standard of living.

The driver fled the scene, but due to poor signage in the area, Kelsey was able to sue the city of Chicago to recover some of the costs associated with her accident—highlighting the way successful litigation is often one of the only ways to guarantee financial help after an accident, even if you have health insurance, like Kelsey did. (And we all know lawyers aren’t cheap; that’s why I married mine!)

The costs Kelsey outlined in our discussion may seem extreme, but they aren’t out of the ordinary:

A 2020 report from the National Disability Institute found that adults “with a work disability require an annual average of 28% more income (or an additional $17,690 per year for a household at the median income level) to create the same standard of living as a comparable household without a disabled family member,” and that working-age adults with disabilities are twice as likely to have incomes under the poverty line than those without. 

This emphasizes the way in which costs can be both direct (in the case of extra accommodations needed to live day-to-day life, like retrofitting a shower or finding accessible transportation) and indirect (in the case of employment discrimination, or when a caretaker needs to take a lower-paying job or work fewer hours to care for a family member with a disability).

Having a disability is expensive, and it’s usually something we don’t plan for

…despite the fact that most of us will be part of the disabled community at some point in our lives. Let’s break down the major expense areas that are typically impacted:

Housing

Depending on the nature of the disability and where you live, you may need to either seek out accessible rentals or renovate your home. Kelsey, for example, lived and worked in Chicago and had to pay a premium for an apartment with an elevator near accessible transportation, typically found in “prime” locations that cost more.

If you own your home and need to install a chair lift, a sit-down shower, wheelchair ramps, additional railings, and other accommodations for mobility—it can cost upward of $20,000 to cover the basics. 

Unfortunately, many insurances won’t cover these costs, despite being necessary. While you may be able to get a tax break for these updates, you’re often paying out of pocket, which highlights how crucial an emergency fund can be (and how unexpectedly you may need it).

Transportation & Travel

“Adapted vehicles” are cars modified to meet the needs of someone with a disability, and according to the National Highway Traffic Safety Administration, they can cost up to $80,000 (more than the median American earns in a year).

Many people with disabilities rely on public transportation or ridesharing, which usually means living in an urban area where public transportation is common. The cost of public transportation and rideshares combined can average about $200/mo. or $2,400/year.

And while buses and trains in major cities tend to have accommodations for disabilities, air travel is more of a crapshoot (this is part of what inspired Kelsey and Jenny to start The Inclusive Traveler). Whether it’s the process of navigating a large and busy airport, using a bathroom on a plane, or trusting untrained personnel with your accessibility devices, traveling with a disability requires a lot more forethought than I had ever considered.

Healthcare

Kelsey’s health insurance didn’t cover the cost of certain medical supplies—and many insurances don’t cover the cost of custom-fit wheelchairs, which can be necessary to retain independence.

Living with a disability often means requiring some sort of device to perform everyday functions: talking devices, canes, prosthetics, specific lighting, hearing aids, medication…the list is long! 

While some of these costs can be reimbursed by a Flexible Spending Account, Health Savings Account, or health insurance, the coverage is frustratingly spotty. According to the latest available numbers from the CDC, the average person with a disability spends $17,431 per year on the associated costs. 

And yet this doesn’t account for the actual cost of healthcare itself, from the higher insurance premiums for higher quality plans to the out-of-pocket costs for doctor’s visits, tests, and therapies. (We’ve chatted extensively about the bewilderingly obvious grift that is the US healthcare marketplace in Money with Katie World before; here’s how I’ve budgeted for healthcare costs in the past.) 

Per the Kaiser Family Foundation, the average annual premium for an individual’s healthcare coverage was $7,911/year in 2022. 

So what’s the total? (Plus, long-term disability coverage)

Everything we’ve discussed totals nearly $15,000 additional (potentially fixed) costs each year between increased housing expenses, insurance premiums, and transportation (which is in line with the estimated average around $17,000 per year).

But as Kelsey mentions in the episode, long-term disability (often abbreviated as “LTD”) insurance can help offset these costs because it replaces lost income from work. (We covered long-term disability insurance in depth in this episode.)

Expect to pay anywhere between 1%–3% of your annual income in LTD premiums. I’ll say the quiet part out loud: This stuff is not cheap, but it can be lifesaving in the event of disability. The paradox, unfortunately, is that those most in need of this type of insurance are often those most unable to afford it—but Kelsey told me her one regret was not getting it before she needed it. (So if your employer offers LTD, say yes!)

Most policies will pay you benefits up until the time you reach retirement age, depending on the details of your policy. There are usually no limitations on how the money can be spent. It can be invaluable as income replacement if you’re unable to work, as Kelsey was for many months after her accident.

There are other resources out there to support living with a disability, like Social Security, Medicare, and Medicaid, to name a few—but they’re not always comprehensive and are typically limited to those who meet fairly narrow age or income requirements.

The reality is that one in every four people will be disabled before they reach retirement age. While it’s hard to save for these circumstances specifically, it makes a great case that quality healthcare, buffered savings cushions, and long-term disability insurance are probably all worthwhile expenses.

Burnout (and subsequent guilt about the burnout)

After only a year, I began to feel symptoms of (what I learned later was) burnout. According to WebMD, burnout is the condition in which, after extended periods of feeling “swamped,” you’re unable to escape feelings of general overwhelm. 

I didn’t understand why I felt this way. I found myself struggling to stay focused, needing frequent breaks, feeling tired all the time, and having emotional flare-ups over work stuff. 

It sounds whiney, I know—working a “fake email job” in a climate-controlled office would hardly register as “work” to my meatpacking ancestors who probably stood knee-deep in questionable fluids for 12 hours each day, but something felt inescapably meaningless about the barrages of email threads, Powerpoint decks, and back-to-back 30-minute “touch bases.” 

On one of my first work trips, an older colleague told me, “You have to remember that perception is reality. Even if you’re doing a great job, if someone sees you at your desk scrolling on your phone, leaving early, or coming in late, they’re going to think you’re not working hard. People talk.” 

You’d think working from home for three years would’ve helped to alleviate this (and in some ways, it did!), but the Wall Street Journal pointed out that the reason we were all working from home (and how) meant these feelings intensified. 

The expectations at work didn’t slow or cease because we were taking calls from our living rooms. The pressure to prove we were still working hard in the face of furloughs escalated, and new “productivity” software emerged to fill the gap: Microsoft Teams, the proliferation of Slack and Zoom, and other chat apps that meant you were now accessible at all hours of the day and night. Ironically, this somehow replaced actual productivity with a sort of endless toiling; LARPing your job as opposed to actually doing it.

It became clear to me early in my career that it wasn’t enough to just work hard—I had to look like I was working hard. Work meant two things: Actually performing, and performatively performing. The latter was more exhausting than the former.

The crazy part? 

All things considered, I had a great job. I had (what I thought was) my dream job, so I couldn’t pinpoint the source of my existential dread.

I vastly underestimated how mentally draining—yet somehow bizarrely un-stimulating—it would be to work 9–5 in a big corporate setting. 

And nothing makes burnout worse than feeling guilty about feeling burnt out. My guilt (“I should just be grateful I have a job at all!”) intensified as more time passed.

I had been so excited to begin my career that I couldn’t understand why (only a few years in!) I was already feeling disillusioned. I was a sitting duck for financial independence propaganda.

None of this would’ve mattered if my livelihood hadn’t literally depended on it

In retrospect, it’s clear the exhaustion was a byproduct of my personal safety and security being wholly tied up in not just the job, but also in others’ perceptions of me.

The constant maintenance of perception (or occasional bouts of apathy) wouldn’t matter so much if our livelihoods didn’t feel like they depended on those perceptions. 

You could make the case that none of this stuff would’ve actually been materially detrimental to my career or impacted whether or not I received a paycheck—but tell that to a neurotic 22-year-old with no money who doesn’t know any better and just signed her first 12-month lease. 

It’s no wonder the financial independence movement became so attractive to me, because it promised both freedom and reprieve from all of this posturing. 

There’s just one rather obvious problem: It can take a really long time to achieve. So long, in fact, that many young people throw in the towel before they begin—ironically enough, the polar opposite approach to “gunning for financial freedom” is “conceding in the first inning that you’ll never reach it and just spending everything you make while the going’s good.”

As writer Kayti Christian points out, it’s pretty challenging to get off the hamster wheel when the hamster wheel pays your bills, but the fundamental mistake is allowing those bills to swell larger and larger, rendering the hamster wheel that much more necessary. 

Most of us do not freely choose to engage in behaviors that lead to burnout, we engage precisely because we feel we have no other choice. 

It feels as though we can’t turn our back on the late-night email or the unread message, because what if that person gets angry and then what if someone else finds out you’re not responsive and then what if next quarter you don’t get promoted and then what if you can’t afford your mortgage and what if, what if, what if—

Our security is so intrinsically tied to our jobs that disengaging when feeling burnt out doesn’t seem like a safe or responsible option. If we lose our jobs, we don’t just lose our income: We lose our healthcare. We lose our retirement plan (or rather, the ability to contribute to one). We lose our identity, in some cases. 

Sometimes, it’s hard to deny that true safety and security in the US often looks a whole hell of a lot like just having a bunch of money.

When we talk about this in the context of financial independence, we usually mean the ability to do something extreme—like quit a job. But my perspective on true independence has evolved: It’s not about disengaging completely, forever. True independence is more impactful than that. It enables you to move about your work and life in a way that isn’t rooted in fear of it all crashing down. 

We move through life differently when we’ve self-insured our own safety and security. 

“I don’t need this” is a life-changing perspective with which to approach your career. It allows you the ability to change paths at any time—and money grants you access to that gated area of invincibility behind the velvet rope more directly than just about anything else. 

This is the moat that money can build around you. It’s permission to separate your work—your livelihood—from your most fundamental needs, and behave accordingly. Saying what you actually think, taking time off when you actually need it, and doing what you actually want to do. 

This is why I pursue financial independence. Not because I think next week (or even next year) my moat will be wide enough, but because it never will be if I don’t keep digging. 

Money is power—and it’s the kind of power you can seize for yourself with enough saving and investing. Nobody in upper management has to give it to you. 

So let’s start with the best part:

Unless you’re retired and drawing down on your retirement accounts, you don’t have to worry about your 401(k)s and IRAs during tax season.

Your 401(k) and IRA are great tax-advantaged investment vehicles. You aren’t taxed on the growth in those accounts every year the same way you’re taxed on the growth in your taxable accounts. After all, that’s kinda the point.

So what does this mean? You can buy and sell and rack up dividends and interest inside these accounts without worrying about paying taxes annually on any of the gains. It’s all tax-sheltered.  

The TL;DR: If you do all of your investing inside retirement accounts, nothing I’m about to share really applies to your situation. We really only need to concern ourselves with investment taxes during our accumulation phase inside taxable brokerage accounts.

(And a note: The term “taxable” gets its name from the fact that it refers to pretty much everything that isn’t a tax-advantaged retirement account.)

So if you have brokerage accounts, what do you need to know about the taxes?

If you contributed to a brokerage account over the last 12 months, it’s likely that you experienced some gain or loss. For example, if you invested $1,000 in March 2024 and today you have $1,200, that $200 difference is your capital gain. It’s the gain that your capital of $1,000 earned. 

For most index fund investors, growth will be composed of two things:

• Capital gains, where the asset went up in value; in other words, it’s worth more now than when you bought it

• Dividends, which you can think about like a token of appreciation from a company; the company is essentially distributing its profits to shareholders directly, and some companies offer higher “dividend yields” than others

• For example, if you buy a $20 share of a company that offers a dividend yield of 5%, you’d earn $1/share.

Capital gains and dividends are taxed differently than earned income—and if you’re just dollar-cost averaging into an account and not selling anything, you won’t pay any taxes on the capital gains.

You only pay taxes on capital gains when you “realize” them, which essentially means when you sell at a gain for any reason. You may be wondering: If I’m selling something within my brokerage account but then using the money to buy something else and not withdrawing anything, do I still have to pay taxes on the gains? The answer is yes. 

Even if all the money stays within the confines of the brokerage account, those “realized gains and losses” from buying and selling still trigger a tax event.

So let’s talk about how capital gains are taxed, when you finally sell.

Your capital gains are taxed based on how long you held and your total income from all sources—your salary, your side hustle, your investment income—add it all together and imagine stacking the capital gains on the very tippy top. 

If you sell after…

• Fewer than 365 days: You’ll pay your marginal tax rate on the gain. This is definitely suboptimal and should be avoided if possible.

• For example, if we had sold our $20 share at $25 after, say, six months, and we’re in the 24% tax bracket, we’d pay $1.20 in taxes on the gain of $5. Gross. Of course, it’s still better than nothing—you still have $3.80 you didn’t have before—but you’re less ahead than you could have been if you had waited or sold older shares first.

• Greater than 365 days: You’ll pay the capital gains tax rate on the gains. The capital gains and qualified dividends tax brackets are a lot easier to navigate than the progressive tax system and can be way more forgiving.

• If you (as a single person in 2025) have $48,350 or less in total declared income, you won’t pay any taxes on your long-term capital gains. For married filing jointly, the 0% bracket covers up to $96,700 in total income.

• If you have between $48,351 and $533,400 in income in 2025 (yep, that’s not a typo), you’ll pay 15%. For married filing jointly, it’s $96,701 to $600,050.

• And if you have $533,401+ in income, you’ll pay 20%. If you’re married, it’s a total income above $600,051.

Because of how broad it is, most people fall into the 15% category. 

So remember our $1.20 in taxes on our $5 short-term capital gain before? If they were long-term capital gains, we’d pay 75 cents. And even if you’re bringing in $400,000 per year as a single person and would be in the 35% marginal tax bracket, your investment income (the capital gains) are only taxed at 15%.

But what if you’ve been dollar-cost averaging into various holdings over time? If you’ve been adding little by little, how does the brokerage firm know what to sell? The shares I bought last week, or the shares I bought three years ago? My gain will be different depending on my cost basis (the amount I paid for it), so how do I know?

Brokerage firms typically use FIFO—first in, first out—automatically, though it’s definitely worth a Google for your brokerage firm. This means they’ll sell your oldest shares first to satisfy a sell order. If you bought something three years ago that has a $5 gain and more of it last year that has a $2 gain, it’ll sell the older shares with a lower cost basis first.

Firms like Betterment make this pretty easy, too; they’ll warn you of the tax impact of selling before you press any scary buttons, and confirm you still want to make the move.

And don’t forget about state capital gains taxes, which vary depending on where you live and how much you earn. Here’s a list from SmartAsset; Command-F to your heart’s content to find your state’s rates (now I know why everyone retires to Florida).

But let’s circle back to those dividends, because they’re taxed a little bit differently

Your dividends will be taxed annually whether you reinvest them or not (that is, whether you keep them in the account and set them to “reinvest,” or withdraw them). You pay taxes regardless, because they’re always considered “income” in the year you earn them.

There are two types of dividends:

• Ordinary dividends are taxed like ordinary income; in other words, you’ll pay your regular tax rate on these bad boys.

• Qualified dividends that meet certain requirements are taxed similarly to capital gains using the more forgiving brackets described before.

Your 1099-DIV that you receive from the brokerage firm will clearly outline both your qualified and ordinary dividend amounts. 

Now, it’s important to note: If you’ve set your dividends to reinvest (which is generally the advisable thing to do), you’re technically being taxed on income that you never withdrew as cash—which is different from the way you’re taxed on the income you receive on your paycheck, because you’ll essentially need money from another source to pay a tax bill associated with your dividends. This won’t be much in the beginning, but if you have a huge brokerage account worth hundreds of thousands or millions of dollars, you could theoretically generate a dividend income tax bill in the thousands.

You may not need to sell any holdings because you need cash, but you may find yourself in a position where you need to sell in order to rebalance your portfolio.

Rebalancing is effectively saying, “Okay, my goal was to own 90% stocks and 10% bonds across my portfolio, but 5 years have passed, and my stocks grew way faster than my bonds did, so now, my actual allocation is 95% stocks and 5% bonds,” which might be too risky for your liking. 

In order to get back to your goal allocation of 90/10, you have two options:

• You can sell stocks and use the money to buy bonds.

• Or, if you’re still contributing and growing your accounts, you can contribute your new cash in such a way that it buys more bonds than stocks for a little while until your bond allocation is larger.

Keep in mind, though: It’s helpful to think about your portfolio holistically, as the sum of its individual parts, because it’s a lot easier to buy and sell within tax-advantaged accounts—so it’s possible you could handle the majority of your rebalancing within those accounts, depending on how much you’ve squirreled away across them.

In a scenario where your money is primarily allocated to tax-advantaged accounts, you may decide to venture over to a 401(k) that’s beefy and offload some of your longest-held stocks to reinvest in bonds and leave the brokerage account alone.

If you find yourself rebalancing, you have a few considerations:

1. The first is to try to rebalance within tax-advantaged accounts where you won’t get dinged with capital gains taxes.

2. The second is to be mindful of the upper capital gains tax bracket where you’d creep into 20% territory. If you’re a high earner and/or selling a lot at once to rebalance, you want to ensure you don’t accidentally breach the upper limit of the 15% bracket and begin paying 20% on some of your gains.

Ideally, this is something that can be done little by little over time, rather than all at once.

So far, we’ve mostly talked about how taxes affect your investments if your holdings are up—but what if your stocks are down? 

If you invested money that’s at a loss (for example, how most of our portfolios looked at the end of 2022!), tax loss harvesting is effectively what happens when you say, “Hey, I invested $100 and now I only have $80. I want to take a tax deduction on the $20 I lost to help ease the pain of failure.” Just kidding. You’re not a failure. You’re an investor along for the ride!

Here’s how it works: You sell a holding that’s decreased in value so you can recognize a capital loss (your 1099-DIV should also list your capital losses), which can then be used to offset gains from other investments. 

The important part, however, is not that you’re just cashing out and walking out of the stock market casino. You’re reinvesting your $80 in something similar, but not “substantially identical.” You could sell a position in the S&P 500, lock in your loss for the year, then immediately turn around and invest that same cash into a Total Stock Market fund, which has such similar holdings that it’s effectively giving you exposure to almost the same thing—cap-weighted US stocks—but you’re also benefiting from the loss you experienced. 

Unfortunately, you have to sell by the last day of the year, so it’s too late to do this for 2024 securities—but keep it in your back pocket in the future. If you use a robo adviser like Betterment, this happens automatically if you have the feature turned on. 

This is only a benefit in taxable accounts—there’s no such thing as tax loss harvesting in an account where you aren’t subjected to capital gains taxes, like a 401(k). 

This is a bit of a tricky maneuver: For one thing, you want to be careful of avoiding what’s known as a wash sale. 

This is when you sell an investment at a loss, but buy a “substantially identical stock” within 30 days before or after that sale. Note that the wash sale rule also applies to any substantially identical stocks or securities purchased by your spouse or a company you own, so if you were thinking of getting crafty by assigning bae some Robinhood homework, think again. 

This can be complicated if you have a lot of multiple accounts that are dollar-cost averaging into similar holdings. To extend our earlier example, if I sold my S&P 500 holdings at a loss to repurchase the Total Stock Market in my brokerage account, but my 401(k) plan purchased the S&P 500 two weeks later as part of its standard operating procedure, I’m pretty sure this would trigger a wash sale and invalidate the whole thing. 

Regardless, when executed correctly, you can typically deduct up to $3,000 of losses per year, and if you have losses in excess of $3,000, you can carry them forward into the future to offset Future You’s gains.

Phew, okay. So, should all this talk about taxes scare you away from investing?

Well, would you turn down a raise because it means you’re going to have to pay taxes on that incremental money? No, probably not.

But this post makes a decent support case for maximizing your 401(k) and IRA contributions first, since the ongoing tax situation on those bad boys is pretty simple.

For everything else, there are ways to help minimize the pain. First and foremost: Try your best not to sell assets that you’ve had for less than a year. That’s one great way to help minimize your tax liability on growth, since once you cross the one-year mark, you’ll be dropped down into those sweet, sweet capital gains tax brackets.

What can you expect at tax time?

Most firms will send you something called a 1099-DIV (or maybe a 1099 Composite) by mid-February. This will list your capital gains, ordinary dividends, qualified dividends, etc., and you’ll upload the form to your tax software of choice or give to your CPA.

Even if this feels like a lot to manage yourself, you have options:

• If you invest with a roboadvisor, it’s likely they’ll have automatic rebalancing and tax loss harvesting features you can turn on so you don’t have to worry about doing it manually.

• Plus, your 1099-DIV forms will spell out the results of each account for you, so get familiar with them! It’s relatively easy to plug the numbers into tax software, but there’s no shame in hiring a CPA to handle it for you—they can answer questions and make suggestions that may lessen your tax burden.

And remember the best news of all. If you’re making enough income from your investments to be taxed on it, you’re in #RichGirl territory. Embrace it.

So your company is offering you discounted access to company stock. What do you do?

(Pssst…for our full deep dive on all things stock-based compensation, check out this week’s episode of The Money with Katie Show!)

We only sprinkled a little bit of podcast fairy dust on ye ole’ Employee Stock Purchase Program (ESPPs) on the show this week, so I wanted to talk about my take on ESPPs in more #depth here.

ESPPs are generally treated as part of your paycheck elections (that is, you can opt to buy discounted stock with your income instead of taking it as income).

Some employers will pay you with stock as part of your compensation package (and this becomes increasingly popular as you move up in a company), but we’re not talking about receiving stock as compensation here—we’re talking about the option to buy it at a discount.

It’s important to consider the potential pitfalls of any investment decision, especially when it comes in the form of HR paperwork and well-intentioned Janice from payroll encouraging you to “get that 10% discount on the stock!”

According to Human Capital, 85.5% of information technology companies and 68.3% of healthcare companies in the S&P 500 offer ESPPs to their employees. In the Russell 3000, 67.7% of IT companies and 60.2% of healthcare companies provide ESPPs. In other words, if you work for a large public company, the chances are good you’ll have some version of this option available to you—but there are many different ways to structure such a perk.

There are effectively two ways to use your ESPP: One is like walking through the front door, and the other is like using the revolving door in the back.

First, let’s break down the risks of “walking through the front door”—using the ESPP as a buy-and-hold strategy.

The main risk? Compromising diversification of your investment portfolio

You know how I’m always harping about how one of the best ways to protect yourself in down markets is to be properly diversified?

When you participate in an employee stock purchase program, you’re trading diversification for cheaper access to a particular asset. Usually, the discount is somewhere between 5%–15%.

As we’re all probably well aware by now, as a general rule, I don’t believe in buying any individual stocks as a major component of my investing strategy. 

A 2021 JP Morgan study examining the loss probability of individual stocks found that 42% of stocks in the Russell 3000 had negative absolute returns between 1980 and 2020 and 66% trailed the index as a whole (which is a fancy way of saying, 6 in 10 individual stocks that made up the index actually underperformed the average of the 10 overall). All that to say: You have worse than a coin flip’s chance in working for a company with a stock that beats the index over the long run.

And while it’s certainly possible, it’s—statistically speaking—not overly likely in the long term.

Now, I always used to caveat this speech by saying, “That is, unless you work for, like, Facebook!”

…except for the fact that—this year—the stock’s meteoric gains were almost totally wiped out after the company placed a huge bet on the metaverse, and was down 65% by the end of the year. 

The other issue at hand? If you work for one of the biggest tech companies and own a bunch of S&P 500 or Total Stock Market index funds, you already own a disproportionate amount of your own company’s stock. Apple alone comprises 6.3% of the S&P 500 index fund.

And while you can make the case that Apple and Google are going to continue their climb to world domination, if history is any indication, most big companies are eventually usurped. Owning too much of any one company—no matter how dominant it seems today—isn’t the safest plan if your investing strategy is intended to carry you through the next few decades.

One counterargument I’ve often heard is, “But if I’m working for this company and have an impact every single day on its success, isn’t that worth betting on?”

…and I think that point stands if you work in a four-person startup.

If you’re working for a company that’s already large enough to be publicly traded, it’s unlikely that your contributions as one individual are going to have any real bearing on what the stock price does or the long-term success or failure of the company (unless you’re the CEO or another exec; in which case, would you like to sponsor Money with Katie?).

There’s one other risk associated with holding too much of your company stock:

The secondary risk: Your income and investments are tied up in one company’s success

While this doesn’t really apply if your company stock accounts for a tiny fraction of your total portfolio (which may be a bet you’re willing to make), if you’re primarily investing in company stock and taking your paycheck from that same company, you’re relying on the same hen for all your financial eggs. (How’s that for a twist on the “eggs in one basket” analogy?)

The same point goes for the big tech employees—your company is already disproportionately represented in your index funds, so you’re placing an even bigger bet when you load up on more.

After all, “diversification” means owning assets that aren’t perfectly correlated—and it doesn’t get much more correlated than big tech and the S&P 500.

If something happens to your company, not only do you lose your paycheck, but that portion of your portfolio suffers, too. (Enron employees have entered the chat.)

Regardless of who you work for or how great they seem, that risk may not be worth taking.

Of course, most people who use an employee stock purchase program aren’t only investing in their own company stock—but I’ve definitely seen young new hires sign up for the program in an attempt to be a well-intentioned Budding Adult and not bother to invest anywhere else.

In that way, their entire financial future is tied up in the success or failure of one company. It’s too risky.

But what about using the revolving side door? That’s another story.

How to hack your ESPP for a guaranteed return

All of that proselytizing out of the way: Depending on how your ESPP is structured, it might be a way to get some guaranteed returns on your money. 

Let’s take a walk down benefits planning lane, shall we? If your plan…

• Provides a discount on the stock

• Accumulates your cash contributions over a defined “accumulation period” or “offering period” (call it 6–12 months) and then buys the discounted shares of your company stock on the purchase date

• AND allows you to sell immediately (with reasonable trading costs) without restrictions or blackout dates, with bonus points if your ESPP allows you to automate the sale…

…then you may be in a good position to take advantage of this revolving side door. 

By allocating a portion of your income to a plan like this, you’ll “guarantee” a 15% return on your investment (minus ordinary income tax). Some companies will even honor the lowest price of the stock over the offering period on the purchase date, so it’s possible you’ll capture even more upside—it’s worthwhile to dig into the details of how your plan is set up.

For example, if your company stock costs $10 per share and you get a 15% discount, your company would accumulate your cash contributions during each pay period over the length of the offering period, then buy shares for $8.50/each on the purchase date. If you were to place a sell order immediately, you’d earn $1.50 profit per share, on which you’d pay ordinary income tax come tax season.

That’s a 17% return on investment ($1.50 earned on $8.50 invested), with a marginal tax rate-sized #chonk taken out for your ordinary income taxes. If you’re in the 24% bracket, for example, you’d earn $1.14 in net profit on each $8.50 invested—a 13% real return on investment, on up to $25,000 worth of pre-discounted stock per calendar year. 

Of course, you have to weigh this priority with your other financial priorities (for example, contributing to a 401(k), an HSA, a Roth IRA, etc.), but if you’re in a position where you’ve checked those boxes and you’re looking for other #optimizations to make, it might be worth exploring whether or not your employer stock purchase program is structured in a way that would make this possible.

It sounds like a lot of back and forth, but if your company allows you to automate your contributions and sales, it may be well worthwhile (and an automatic savings device, like your 401(k), which is valuable in and of itself because it takes indecision and forgetfulness out of the equation).

Before making any big moves,

Consult a tax professional. Per the disclaimer on this website, I am not a licensed financial professional—just a gal who loves to invest, learn about the tax code, and share what I find.