Whether you’re a W2 employee, a solopreneur, or a small business owner, we all want to secure our future, especially when we go into retirement. We want to spend our days not worrying about finances. But planning for a better future can be confusing and uninteresting because of the many different tax and investment strategies to choose from. Things are unpredictable and may not go the way you want them to. If you have a hard time choosing what’s best for you, this episode is just right for you! We have our guest, the Money Nerd, Tess Zigo, to share the different strategies you could take to have a better future. Your future depends on what you do right now, so get a move on and live a fantastic life!
Listen to the podcast here
Tax And Investment Strategies For Securing A Better Future | Tess Zigo
In this episode, I’m sitting down with Tess Zigo, who is a Certified Financial Planner. She’s been on the show before, so if you haven’t read her previous episode, go back and check it out. The title of it is How to Create Wealth Starting With the End in Mind. In this episode, we will be talking about different tax strategies and investment strategies for whether you’re a business owner or a W-2 employee.
The tax strategies can be a little bit different if you own your own business. You can have certain deductions, whereas as an employee, you’re not going to have those deductions. We’ll dive into some of those details. We talk about different ways to save money and invest money, so your money’s working for you or your money is growing instead of sitting in a bank or in a savings account and not doing anything for you. We’re going to talk about all that. I hope you get some value out of this and let’s jump right into it.
I started this show because I’m extremely passionate about connecting you with the people and the local businesses that make Palm Harbor so special. Palm Harbor, Florida, is a great place to live, work and play. It has everything you could dream of, from the food, the outdoors, and the lifestyle to the people in the community. I wanted to create a podcast that connected the community and inspired everyone to live better.
To join this community and stay up-the-date on all things Palm Harbor, visit my website. It’s PalmHarborLocal.com. Sign up there to join the locals. Remember that together, we keep Palm Harbor local. Welcome, Tess. I appreciate you jumping back for round two. You’ve been on the show before, but now we’re jumping back into it and talking more about tax strategies for business owners, employees, and investing and talking more in-depth in that world, correct?
Absolutely. Thank you, Donnie, for having me. It’s a true pleasure. We just got through tax season for 2021, so I thought, while it’s fresh in everyone’s mind, let’s talk about taxes because I always say, “Tip your waiter and not the IRS.”
I think everyone’s most familiar with 401(k)s. As a business owner versus a W-2 employee, talk a little bit about that and some of the differences and the options there for them.
If you work for a corporation or you have worked for a corporation in the past, you’re probably familiar with the 401(k), which is the retirement contribution plan where you can put in money pre-tax, typically. Sometimes you do have a Roth option within your 401(k), which is after-tax dollars. The whole idea with the 401(k) plans is they replace what we used to have in the workplace, which was pension plans. Back in the day, you retired, you stayed with the same company for 30-plus years. You got a gold watch and a pension, which was the company’s promise to pay you X dollars for the rest of your life. Thanks to your loyalty and your hard work.
In our generation, pensions are pretty much extinct, so we have the 401(k), which are you contributing and potentially having a match from the employer that you work for, which I like to think of as a free lunch and everybody likes free money, so please take it. If your company is matching X percent of your contribution, you should take advantage of that.
The 401(k) puts you in the driver’s seat. You are in charge of deciding how much you want to contribute and picking your investment option within that plan. Unlike the pension plans where the company takes all that risk and they give you the guarantee of X dollars for life, you are now in the driver’s seat. It’s up to you to make sure that you’re going to have enough money when you get to retirement.
Did the employees pay into the pension plans back then or not?
In our generation, pensions are pretty much extinct.
Back in the good old days, it was the employers who took this upon their shoulders to say, “We’re going to contribute for your benefit when you retire.” Now it’s, “You are going to contribute for your benefit when you retire and we’re going to throw in some money into your 401(k) potentially.” I would say most of the companies that I know do contribute a certain percentage, but typically it’s a small percentage. It’s also up to you to make sure that you’re saving and investing that money so when you get to the other side where you no longer want to work or you’re forced at a certain stage to care for a family member or whatever it is that forces you to retire, you have enough money.
There are some options. Once you have money in your 401(k) 10 or 15 years on the line, what can you do with that money? Whether you keep it in the account, transfer it to other accounts, other investments and that sort of stuff. If you’re a small business owner, so as myself, I don’t have anybody who’s going to match a 401(k). How do I get that set up and what are my options there?
As a small business owner, the first thing to know is that you have options and you have more options because you can pick any retirement account as long as you’re eligible. In that sense, you have full freedom versus when you’re an employee, you have to use what they give you. As a small business owner, depending on how you’re structured and whether you have W-2 employees or 1099 contractors working for you, there are plenty of different options to choose from. I’ll start with the solopreneur because most of us start that way. “It’s me and me alone working for myself and I.”
Typically when you’re just yourself, you have a lot of options. You have the Solo 401(k). That’s an option. It’s the equivalent to the 401(k) for companies, except it comes with a lower admin cost. The 401(k) has admin costs in the thousands. This is $150 a year. I have one set up for myself and the awesome thing about the Solo 401(K) is you can contribute up to $61,000 a year.
You’re capped at $61,000 as a solo entrepreneur.
Unless you’re over the age of 50 and I don’t want to get into the specifics. It’s a pretty significant dollar amount that you can contribute to your future, so you make work optional because we love our business, but we don’t want to work forever. A Solo 401(k) gives you the option to put the money into a retirement account for yourself. It can be pre-tax or a portion of it can also be Roth money. The difference is one saves you on taxes now and the other one creates a tax-free bucket when you retire. That’s the Roth.
When you pull the money from the Roth, it’s tax-free but when you’re investing in it, it’s after you’ve paid taxes.
You’ve got to choose. There’s typically a choice and a trade-off. Do you want to pay taxes now or do you want to pay taxes in the future? The IRS wants to collect their tax dollars, so you can be smart with your strategy in terms of, “Do I think that I’m going to be in a higher tax bracket in the future?” If you’re young and you’re only starting out and you’re just beginning your business, you’re probably in a lower tax bracket because you’re still not reaching that full potential, so I like using the Roth in those first early years.
It’s because you’re paying taxes before you invest it in a lower tax bracket at that point in your life.
There is also the SEP, which is the Simplified Employee Pension plan and SIMPLE IRA. Those are some good options, but you can typically contribute more to the Solo 401(k), which is why I love it. Once you get into really high revenue years, you’re making well over $300,000 in income and you want to pay less tax and build up your retirement nest egg, we then start looking into the cash balance plans. That’s just another retirement account that we can use to put money pre-tax. It’s reducing your tax liability now and making sure that you have a big nest egg for when you no longer want to work.
With the Solo 401(k), there’s nobody there that’s going to match it. There’s no way to have somebody match a small percentage of what you’re putting in there as a solo entrepreneur. Is that correct?
Correct. It’s basically you, yourself and you. There is an employee deferral and employer deferral and you’re both, so yes, it’s all your money that’s going into that vehicle.
I think you touched on this, but some of the differences between a Roth IRA and a SIMPLE IRA. Is that correct?
Yes. I think Roth IRA and just an IRA. You have to choose when you want to pay taxes. The difference is just timing. In the Roth IRA, you’re paying taxes now. In the IRA, you’re paying taxes in the future when you take money out. That’s a big difference.
It’s like if you have a 401(k), that’s what you’re investing, those investment accounts or either a Roth or an IRA.
It’s up to you to make sure that you’re going to have enough money when you get to retirement.
It’s definitely something that you want to have set up. Whether you’re a solo entrepreneur or a W-2 employee. If you’re a W-2 employee, take advantage of that percentage that your company’s contributing.
Take advantage of the free money if you’re a W-2 two employee. If you’re a small business owner, just know that there are plenty of options and it’s not that hard to get an account set up. I always recommend talking to a financial planner, partly because I’m biased but partly because small business owners can’t do it all even though we try hard but sometimes it pays dividends to talk to the experts.
Even if you just started out, use a financial planner to give a better understanding. As we were talking about before, using a CPA to better understand what it is you’re doing and then if you want to do it later on by yourself, go for it, but it’s a lot. As we were talking, the tax law is always changing. What you’re investing in is always changing.
I like to think of it as the opportunity cost and how much is your hour worth? Unless you are a money nerd like me and you love reading and consuming personal finance, it’s probably going to take you a lot of hours to figure out what makes the most sense for you. You could be spending that time doing what you’re good at and doing the things that you enjoy doing.
You then make more money as a solo entrepreneur and then you leverage somebody else’s expertise. I’ve been learning a lot about leveraging other people’s expertise lately. Do the things that you want to do and that you’re good at. It’s extremely important, but not everyone understands that.
It goes back to, for example, I was shopping for a house. I am not a realtor. I don’t know where the good school districts are. I don’t know where the flood zones are. I don’t know what to look for, so I rely on your expertise to tell me what I need to know so I can make an educated decision.
It’s not information that isn’t available to the public. You can get all that information, but you’ve got to figure out where to go to get that information. Let’s talk about the Health Savings Account. Shopping for insurance is something that always comes up like, “Do you want a plan or a Health Savings Account? Do you want to contribute to the Health Savings Account?” I personally have never done it, but I would love to hear your thoughts on some of the advantages and why it’s good or why it’s not good.
I remember going to a conference and they were talking about HSAs and the triple tax advantage account, as they called it. I thought, “Tell me more. That sounds like the best-kept secret.” Here’s the deal with HSAs. They have triple tax savings and you don’t get that a lot. With all the other retirement tax advantage accounts that we have, typically, you’re getting a maximum of two advantages, but with the HSA, you’re getting three. The money you put in is pre-tax. It reduces your taxable liability in the year you contribute.
The money grows tax-deferred. You’re not paying any taxes on all the interest in the growth within the HSA. Meaning you can invest the HSA funds, so the money that you’re putting into the HSA, if you don’t use it for medical bills, actually acts as an investment account. You can invest that money and have it growing for you. When you get to a point in time where you retire or at any point in your lifetime, you take that money out tax-free as long as it’s used for medical expenses. In a nutshell, you’re never paying taxes on that money.
I didn’t know it was an investment account. I thought it was just an account that you paid into like a savings account and if you had those medical expenses, you could just pull from that account, but you can invest that money.
That’s why it’s grown in popularity because people now realize that, “I can invest this money. It doesn’t have to just sit there in cash.” It’s not like the FSA, which is the Flexible Spending Account. That’s usually the alternative option that you get through your employer. They say, “Pick this plan and get an FSA or an HSA.” The FSA money, you use it or lose it and at the end of the year, “Sorry. You didn’t have medical expenses, too bad.” With the HSA money, it is your money. You get to keep and roll it over the years and hopefully, you’re investing it so that money is actually growing and compounding over the years.
Also, it’s a deduction on your taxes, the money that you’ve invested into that account.
Here’s another tip and trick. If you’re not into the tax code, it’s okay. I’m not offended but leverage your CPA and your financial planner. With the money that you put into the HSA account, you don’t pay FICA and Medicare taxes either. You don’t pay the social security and Medicare taxes, which is about 7%. Not only are you skipping on the federal, but you’re not even paying the payroll tax.
Basically, you’re saying everybody should have an HSA account.
I’m saying that it’s something you should consider. The caveat is with HSAs, you’re only eligible for a Health Savings Account if you have a high deductible medical plan. You do have to weigh your high deductible medical plan versus whatever other medical plan that you are offered to make sure that’s still a good medical plan.
Not everybody has that option to have one of those accounts. The advantages there are pretty significant. If that works out for you and your interests, that’s a great plan. Let’s dive into investing money versus saving money. It’s that approach, mindset and that sort of stuff. When we talked about this before, I’ve read the book Rich Dad Poor Dad which is one of the first books I’ve read that changed my thought on money, investing money and that sort of stuff.
We love our business, but we don’t want to work forever.
I feel like a lot of our parents’ generations have the “poor dad mindset,” or are like, “Let’s save money. Let’s put money into a savings account, retire, and then live off that savings account. Whereas the Millennials and the younger generation have that rich dad or like, “I’m going to invest money in different avenues and grow my money.”
As you’re talking, here is how I picture myself and this is the easiest way that you can understand why investing is so important. Picture yourself, there’s a big mountain top and you are pushing a big rock up that hill. That’s what it feels like initially when you start to invest. It’s because you’re pushing this heavy rock up this steep mountain. When you’re young, you’re starting your career, which is when you should start investing, it feels like, “I have student loans. I need to buy my first house. There are so many priorities. How do I balance saving and investing with everything else that I want to spend money on?”
Those first few years feels hard, but if you just push a little harder and get started, it’s all about those little habits that add up over time. You build those habits and you get momentum and then eventually, you’re going to get to that top of the hill and the rock will roll down and it starts to feel easy. That’s ultimately the power of compounding and investing. If you can just get up to that top, the money will just continue growing for you and paying you dividends. Ultimately, work becomes optional. That’s the goal. You can live off your hard work and your investments and you no longer have to push it uphill.
There are different ways to invest your money, but as you said, the important thing there is to start as early as you can. Even if it’s just a small amount of money, just build that habit of taking money out of each paycheck and investing it.
This is a Chinese proverb I’m told, but it’s one of my favorites. It says, “The best time to plant a tree was twenty years ago. The next best time is today.” The key here is to start where you are. Start small. If you have $20 a month, start there. It’s the same thing with buying your house. When I was in my twenties, my first house wasn’t a mega mention. It wasn’t a waterfront property, but it was a townhouse and we could afford it. We ended up selling at a much higher price than I ever imagined possible and it helped us buy our second house, which I love. It’s all about those little steps that you take through your life.
If your careers are starting or you’re just now realizing like, “I should start investing some money,” what are some good options for people? What can you talk about in tips and stuff that you can give to get started?
To get started, I always say free money first. If you have that match, please take advantage of it. Another thing to always remember is you have to have an emergency savings account. We all lived through COVID. Some people lost their jobs. Some companies shut down, dental offices were closed for months. Unexpected things do happen. That’s why it’s super important to have at least 3 to 6 months’ worth of your living expenses in a bank account. That’s key. Buying a house can be a great thing for your finances because you build equity over time. Ideally, one day when you upgrade, you make a profit. Hopefully, your property appreciates in value and you’re able to take some of that money and use it for your second home. Hopefully, your dream home.
One thing you mentioned there is having that emergency fund. That’s something my wife and I did quite a few years ago before we started investing. That was something we always contributed to grow. My wife is the one who’s a stickler for like, “We’ve got to make sure that there’s money in that emergency fund account.” Having that there gives you a sense of calm over your finances. If anything does go wrong, you lose your job or the economy goes down, or something like that, you have money set aside for those times. It makes a big difference.
I call it the sleep at night factor and that is priceless. I absolutely advocate for having an emergency fund. It’s one of the foundational things that you need to have in place.
Going back to like investing in real estate. If you buy that first home, more likely than not, the starter home that you’re going to buy is going to have some issues that come up. Any buyer that I work with, we talk about this. You don’t want to deplete every dollar you have when you’re buying a home because there’s going to be something that comes up that needs to be fixed. If you don’t have the funds to fix that and now you’re going to lose your home because of that, there’s no point in investing in real estate then. Having that savings account is huge.
What I do is help people invest in stocks and bonds, financial instruments, which is one way to grow your wealth over time. Historically speaking, we know what kind of rates of return to expect, but there are other ways. You can invest in real estate. Any appreciating asset is what we’re going for. Something that’s going to appreciate over time versus depreciates, typically a car. Now, we live in unnormal times.
I know some people who have made money on their cars in the last couple of years, which blows my mind.
Typically, as soon as you buy a car and you walk off the lot, you lose 20% or so.
You don’t want to invest in cars. It should be in stocks, bonds real estate. Hopefully, these are all helpful tips for anybody that’s reading to plan for the 2022 taxes when you’re doing that. There are some great options for your taxes, for tax planning, whether you’re investing in the 401(k)s or the Health Savings Account. It is all great stuff.
I do want to mention because we are a different generation where the typical worker only stays at their job for an average of 3 to 5 years. It might even be shorter now with the Great Resignation. I want to mention this to anybody who’s changing jobs or who has changed jobs. Don’t lose track of your old retirement accounts. You want to make sure that you know exactly where your money is and how it’s invested.
It might benefit you to consolidate, so you have one account to manage instead of ten little 401(k)s all over the place because I see that a lot. People come to me and they’re like, “I’m getting all these statements and I don’t know what these accounts are or how they are invested.” A lot of times, your money is not invested correctly based on what you tell me is important to you and what you want to achieve in life. Let’s make sure that you have a plan.
I didn’t realize that. The 401(k) stays with that company because they’re the ones that are investing.
It’s your money. Treat it with love and care and let’s make sure that you have a plan.
Reach out to Tess and leverage her time and expertise to help guide you through that process and manage your money.
I like to tell people that I am not your typical financial advisor because people have this perception that all financial advisors have a $500,000 asset minimum and that is not who I am and it’s not who I help. I help the average person like you and me who are starting out that the world is our oyster.
Thanks again for joining us for round two, Tess. It was fun.
It was a pleasure. Thanks.
Thank you again for reading. I hope you had a ton of value out of this episode. Let’s get out there and remember together, we keep Palm Harbor local.
- How to Create Wealth Starting With the End in Mind – Past episode
- Rich Dad Poor Dad
About Tess Zigo
In my 20’s I spent 9 years in corporate finance. I learnt many valuable lessons: from finding my voice, to my way around excel spreadsheets, how to invest millions of dollars for a corporation, manage their cashflow, look at P&L statements and focus on the details. Shortly before turning 30, I realized that I was deeply unhappy and felt stuck in my role as a Treasury Accountant and in the 9-5 corporate environment. I felt like I didn’t belong there anymore.
I took a leap of faith and sent in my 2-week notice when I had my 1st son. I invested in myself and hired a career coach. I was terrified of leaving a salaried position for the “unknown” but I knew I couldn’t stay at a job I hated any longer. Besides, I had worked through our family budget and knew we were on solid footing financially and I could afford to take some time off to figure out what I wanted to be when I grow up.
I searched for a purpose in life so I could align my strengths and passions with my work. It was a long process of self-discovery, but in that difficult period of my life, I discovered my true purpose- To help others with their money -so they too could live their ideal life and NOT wait until retirement to enjoy life.
The old 9-5 waiting until you’re 65 to enjoy your “golden years” is not an ideal life. You deserve better than that! For many years I thought If I just sacrificed enough and saved and invested aggressively to retire early I’d be happy. Unknowingly I was living in the “FIRE” movement- Financial Independence Retire Early crow. But I realized this wasn’t a way to live life fully!
They say life happens when you’re busy making plans. That’s why at TruWealth partners our belief is that in order to live your ideal life you need to balance living your ideal life today and saving for your future too. It’s a balancing act. And as your thinking partner, we will be here every step of the way to guide you as you go through all the seasons life offers- from graduating, getting your first job, starting a family, accumulating wealth and one day retiring-to help you live a Truly Wealthy Life.
So whether you’re feeling stuck in your career or already found your dream career/business but just unsure how to manage your money, I’ve got you covered! Let’s discover what True Wealth means to you!