AS SOON AS THE BALL dropped, ushering in the new year, I got my ball rolling, making contributions to three tax-favored accounts. Why did I do this in January? I like my investments to have all year to grow.
I go through the same routine every year, and it’s always a chore. I invariably forget what to do and, in any case, the steps involved often change.
The first account I contributed to was my Roth IRA. Since my income is too high to contribute directly to a Roth IRA, I do so via the “backdoor.” For that, you need two accounts: a traditional IRA and a Roth IRA conversion account. Here are the steps I took earlier this month:
It’s easier if you set up the ACH link in advance. Otherwise, it might take several days to activate. Make sure you select the correct IRA contribution year and make sure your checking account balance is adequate before making the transfer.
Next, I moved on to my solo 401(k), which is at TD Ameritrade. This is a 401(k) plan covering a business owner with no employees or the owner plus his or her spouse. It has the same rules and requirements as any other 401(k) plan. The business owner wears two hats with a solo 401(k)—employee and employer—and contributions can be made to the plan in both capacities.
The 2021 employee contribution limits are the same as with other 401(k) plans: $19,500, plus an additional $6,500 for those age 50 and over. You can also make an employer contribution, but it’ll be based on your income and you might not know what that number is until the end of the year. The employee account can be of the tax-deductible or Roth variety and is separate from the employer account, which is non-Roth only. Note: Your contribution can’t exceed your earned income. I made the full employee contribution in January as follows:
Finally, I contributed to my health savings account (HSA). If you have a qualifying high-deductible health insurance plan, you can make tax-deductible contributions to an HSA. The money can be invested in mutual funds and other securities, and then left to grow tax-free. Alternatively, you can withdraw the money tax-free to pay for qualified medical expenses.
If you opt to use non-HSA money to pay those medical expenses, the money in the HSA can grow for years. Keep your medical receipts and you can reimburse yourself with tax-free HSA withdrawals in the future. When used in this way, an HSA is referred to as a “stealth IRA.” Most health insurance providers will let you choose your HSA provider. Mine doesn’t. The process for Connect Your Care, where I have my HSA, is as follows:
I can understand how all this can feel overwhelming, especially the first time around. You can, however, simplify the work in January by completing the following steps in advance:
One last piece of advice: Keep step-by-step notes. Your future self will thank you.
Jannette Collins, MD, MEd, FACR is a radiologist and former chair of a university radiology department. Her previous article was Screening Choices. Janni’s passions are finance and education. She is Director of Medical Content for MRI Online, an educational platform for radiologists, and blogs about radiology jobs, finance and education for The Reading Room. Follow Janni on Twitter @JanniMD.