We save money for different purposes; retirement, travel, unexpected expenses, home renovations, etc. Here at Marzano Capital Group, we are big proponents of the “multiple bucket approach”. Different buckets (or savings vehicles) should be used for different purposes. Here are the different buckets I am referring to:
- Emergency Fund – There is no exact science when it comes to how much money you should have in your emergency fund. As a rule of thumb, at least 3-6 months of expenses would be a good starting point and on the higher end if you have a single income household. This bucket is important because it serves as protection, so you do not have to dip into retirement savings or investments that are allocated for something else when unexpected expenses arise. A basic savings account or money market are suitable for this bucket.
- Pre-tax retirement – Common accounts within this bucket are: 401(k), 403(b) and Traditional IRA (Individual Retirement Account). Most employers offer a retirement plan as part of the employment benefits package. Usually, this retirement plan comes with an “employer match” that helps the employee accelerate their savings on a pre-tax basis (qualified savings). This is a great tool and one you should take advantage of, especially if a match is offered. IRAs are non-company sponsored accounts that you can open and fund on your own. There are contribution limits on these types of retirement accounts and the earliest you can access this bucket without penalty is age 59 ½.
- Roth – This bucket could be in the form of Roth IRA or Roth 401(k). Roth savings are done on an after-tax basis and while there is not a tax benefit during the accumulation stage, the tax-free nature of all withdrawals after age 59 ½ can prove to be impactful. This means all of your contributions AND all of your gains will be tax free. There are contribution limits for Roth IRAs and the earliest you can access this bucket without penalty is age 59 ½ as well.
- Non-retirement – These accounts can be in individual name or joint name and have several key components. The first is liquidity. With non-retirement accounts, you can access your money without penalty at any time. You may owe some taxes on withdrawals, depending which investments are sold to produce the money you need. Secondly, there are no minimum or maximum contribution limits. Therefore, you can fund non-retirement accounts with after-tax dollars at a comfortable level within your budget. Often when someone retires before the age of 59 ½, it is the money in their non-retirement account that bridges the gap between their last paycheck and social security and/or retirement account distributions. A lot of people have goals for retiring in their 50’s but fail to have a plan for how they will accomplish this.
All of these buckets/accounts are important and serve a certain purpose. By utilizing each one of them, it can help keep you from using the wrong ones at the wrong times. We would be happy to help you navigate which buckets you should be adding to and help determine the savings rate for each one.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Securities offered through LPL Financial. Member FINRA/SIPC. Marzano Capital Group is an other business name of Independent Advisor Alliance, LLC. All investment advice is offered through Independent Advisor Alliance LLC, a registered investment advisor. Independent Advisor Alliance is a separate entity from LPL Financial.