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Hi Travel Nurses! One of the most frequent questions I get as a financial advisor is from travel nurses who don’t have access to a 401K. So the question they ask is: Can I still save for retirement if I don’t have access to a 401K? The answer is absolutely you can.
So let’s just talk about the obvious right, why 401Ks are awesome.
It allows you to save up to $19,500 before taxes are even taken out of your paycheck which means it reduces your income for tax purposes by that same amount.
That’s awesome.
Also, the growth that you’re receiving in a 401K is tax protected until you withdraw your funds at retirement time.
And of course, if you’re lucky enough to have an employer that’s matching any of your contributions - that’s free money and we like free money.
But if you don’t have a 401K, 403B, 457 or any type of employer sponsored plan, what do you do?
Look, while not having access to a 401K is definitely a disappointment, remember what I have said so many times before: the whole reason why we do financial planning is that it helps you make decisions between two or more unideal situations, right?
And why are they unideal?
Because we’re working with two limited resources - that’s time and that’s money. It’s up to us to figure out: what’s the best way to leverage those resources of time and money.
Okay, so what’s the reality?
Well the reality is this: as a wage earner who doesn’t have access to an employer sponsored account you really have three options when investing in the stock market for retirement.
IRAs
Traditional IRAs
Roth IRAs
Taxable brokerage account
HSAs - your health savings account
HSAs, by the way, are a fantastic tool that is under utilized and could help save you like half a million dollars in retirement. But anyways, that’s for another video.
Now we have to talk about the limitations, because there are limitations with the IRAs whether they’re traditional or whether they’re Roth. $6,000 for an individual is what you contribute to unless you’re age 50 and above in which you can add an additional $1000 in catch up contributions.
Next, taxable accounts - no limitations in how much money you can put in there. But, the real limitation or the real challenge is that they’re taxable and any movement that happens within it comes under immediate tax review.
Then, the HSA where you can put up to $3500 a year as a single individual for qualified medical expenses. And if you think $3500 a year is a lot of money to be put away earmarked especially for medical expenses - think again - because medical expenses is the number one item that erodes away at your retirement savings.
Alright, we’ve got the three options and we know their limitations.
So, how do you get the biggest bang for your buck while investing in these three accounts?
Well, to get the biggest bang for your buck you have to understand how your investments are taxed and you can break that up into two main categories.
Ordinary Income (which is the same income category as what you earned working as a nurse)
Capital Gains
The thing to know about ordinary income is that it will always be taxed at the same rate as any type of income you earn from your job. So, we’re talking about from 10% up to 37%. That we do not like about ordinary income tax brackets.
But, capital gains: if you hold an investment for more than 12 months it qualifies for preferential tax treatment meaning you only have to pay 15% on your profits.
We love that.
So that’s knowledge check number one.
Knowledge check number two:
The second thing you have to understand is when will the IRS expect their money from the profits you’re making in your investments?
There are two events where the IRS wants their money right away.
When you sell your investment at a profit.
When your investment delivers income.
I’m talking about dividends, I’m talking about bond interest payments. These are investments that if you hold onto, they will pay you some type of income in a certain period of time.
The final knowledge check:
The third one is what type of investments will comprise my investment portfolio and how often will I be expecting to sell an investment or to be receiving an income distribution in the form of dividends or bond interest payments?
This is so important to understand because those bond interest payments and those dividend paying stocks all trigger the IRS saying: give me my money.
Okay, let’s go back to working with the limited resources that we have available. We know we have our IRAs and our HSAs which together give up to $9500 a year in tax preferential treatment.
So, this is what you do to get the biggest bang for your buck: you split up your investments into two camps.
One is your long term investments that you just hold, you’re not selling them or trading them in and out. You’re holding it long term. These investments don’t put off any dividend income, and don't put off any bond interest payments.
On the other hand you have your income producing investments, the bonds, the dividend paying stocks, the real estate investment trusts. You save those income producing investments inside of your IRAs and your HSAs - up to $9500 a year. That’s pretty damn good!
Then, all of your other investments that you would only see a profit if you sold it - you put that in your open taxable account.
You know, the best part about this tax efficient, retirement planning strategy when you don’t have a 401K is that: if you save on a taxable account the IRS won’t force you to withdraw a certain amount of money every year like they do in 401Ks and IRAs. So what that does, it gives you a lot of freedom to decide when you will receive an income distribution which allows you to control your tax rate.
Look, I’ve tried to explain this as simply as I can in a short video. But, the truth is there’s a lot that goes into making a solid retirement plan. It just so happens, it’s something that I can help you with. So, if you’re interested in having a solid retirement plan that works for you regardless of whether you have a 401K or not, reach out to me and I’m happy to have a conversation with you. Don’t give up on retirement just because you have limitations. There’s always a way.
Marlon is a licensed financial advisor at weshfinancial.com and is known as "The Travel Nurse Financial Advisor". Marlon specializes in helping travel nurses crush their financial goals by helping them optimize taxes, accelerate retirement savings, and maximize their investments.