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"I'm a traveler that doesn't like to be tied to one company. Problem is retirement. I can only contribute max $6,000/yr outside of an employer to both my Traditional and Roth IRAs. What Should I do to contribute to retirement without a 401k?"
Most people know that one of the best perks of working for a travel agency with benefits is that you can contribute up to $19,500 in your 401k before taxes or $39,000 if you’re booed up in holy matrimony. This far surpasses the $6,000 annual contribution you’re allowed to make across all of your IRAs combined (Traditional and Roth). But for Travel Nurses and other Allied Health Professionals without access to 401k contributions this poses a retirement saving challenge.
So what now?
The good news is that even if you don’t have a 401k you can still contribute to your Roth or Traditional IRAs which is highly advisable. But if you want to stash away more money, you have to become creative with how you create your investment portfolio in an account that doesn’t enjoy the same tax protections.
First, I’ll give you my answer and then I’ll explain the reason why.
5 Money Saving Tips for Travel Nurses
Determine an asset mix that’s appropriate for your risk capacity and retirement time horizon e.g. 60% stocks 40% bonds (this is just an example).
Split your securities into two accounts. Place your bonds and dividend paying stocks in your IRAs and your non-dividend paying stocks in your brokerage account.
Select ETFs and Mutual funds that invest in indices like the S&P 500 with the goal of holding long term (no room for day-trading).
Use “Dollar-Cost Averaging” to invest. DO NOT try to time the market. It’s a fool’s game.
Withdraw funds in retirement in coordination with long-term capital gains and qualified dividends schedule.
The Explanation
Just to be clear, the real question here is “How do I keep the IRS away from my investment money?” The answer is simple. Through portfolio optimization!
In a brokerage account, you can buy and sell virtually any security either in single security form or in a “pooled” investment fund. The problem arises when you’re unclear as to how the IRS views your investing activity. For simplicity's sake, let’s create two tax categories:
Good and Bad.
The IRS will either treat your investing profits as “Ordinary Income”, and you’ll be taxed at the same rate as your paycheck (anywhere from 10% -37%) BAD! Or, “Long-term Capital Gains” where your profits are taxed anywhere from 0% - 20% MUCH BETTER!
However, it’s important to understand that the IRS decides when you have to pay your investment taxes based on the investment actions that occur i.e. selling a security and/or receiving dividends and other distributions. This is where it gets gnarly.
Not all securities and baskets of securities are treated the same tax-wise. If you receive a dividend payment for holding on to a security, depending on the period of time, you’ll either get taxed at ordinary income rates again (10%-37%) or qualified dividend rates (0%-20%). Here’s the thing, you can’t control when you get paid a dividend. Only the underlying company of the stock does. So your best option is to either not hold dividend stocks or bonds in your brokerage account (keep them in your IRAs) or don’t purchase securities that would require you to frequently trade to maintain your investment desired mix.
Option two is to opt for “pooled” investment funds. Most people have heard about mutual funds and their ability to keep your portfolio diversified. But mutual funds come with their own set of tax challenges.
Mutual fund managers have to constantly trade to maintain the fund, triggering tons of taxable events in the process. The worst part is even if you don’t sell your mutual fund, the IRS tacks on the fund managers activity as a tax event for you! OUTRAGEOUS!
But do not fear, mutual fund’s more charming cousin is here: the Exchange Traded Fund, or ETF for short.
ETFs are great because you still achieve the diversification you get with mutual funds but they’re taxed more favorably -- ONLY WHEN YOU SELL! Which means you can control your taxable events as you see fit. Additionally, dividends that are paid out in ETFs are also only counted as a taxable event when the ETF is sold. That’s even more control you have.
So my advice would be if you want to make a tax friendly retirement portfolio outside of a 401k or IRA, invest in ETFs that track market indices like the S&P 500 and utilize a “Dollar-cost Averaging” strategy to save.
While you can never fully escape taxes, an investment strategy like this will help you significantly control your tax costs and when you pay them.
I know that this can all be so very challenging. So please feel free to reach out to me with your questions or to schedule a complimentary call.
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.
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