How taxes and saving change above $350K a year

0:00 Three-hundred-fifty-thousand-dollars per year, somewhere around that number, the rules of money change and nobody tells you. Most people think a bigger paycheck is just more of the same. You get more income, more taxes, and it's all the same game. Well, that's completely wrong and I can show you the exact spots in the tax code where the game changes. Now, for some context on how rare this income actually is, to be in the top 5% of American households, you need to be about $335,000. Top 10% starts around $251,000. So, if your household is above the $350,000, you're roughly in the top 4% of the country. Now, here's the problem with that. Almost all the money advice out there is written for the other 96%. All of it is aimed at people trying to get to where you already are. So, you're following advice that was never written for your situation and you're paying for that every single April. I run a wealth planning firm and I look at tax returns from households exactly like this all year long. And I see the same three shifts on every single one. Number one is the tax system starts working against you and weighs your paycheck completely hides. Number two, the standard advice stops being enough even when you follow it perfectly. And number three, the whole game changes from earning money to structuring money. And the people who figure that out early are the ones who actually end up being wealthy instead of just well-paid. So, let's go through them in order because the first one is probably costing you money right now.

1:00 There's a line in the tax code at $250,000 of household income and most people cross it without ever knowing it's there. The second a married couple goes over $250,000 in wages, an extra Medicare tax turns on. 0.9% on everything above the line. Now, it might sound small, but on a $100,000 over the threshold, that's 900 bucks per year, every single year, and you get nothing extra for it. Now, you cross that same line with investment income and a second tax turns on. It's called the net investment income tax. 3.8% on your dividends, your capital gains, and your rental income once your total income is over $250,000. And your brokerage account withholds nothing for it. It just shows up on your tax return in April. Let me show you the math on a real household. Let's say you're at $400,000 with $150,000 of wages above that line and $20,000 in gains and dividends this year. The extra Medicare tax is about 1350, the investment tax is another $760, call it $2,000 a year in taxes that most people have never even heard of. And here's the part that should bother you. Those thresholds were set in 2013 and they've never been adjusted for inflation, not once.

1:50 $250,000 in 2013 was a very different income than $250,000 today, but the line never got moved. So, every year more regular high earners get pulled into taxes that were originally sold as taxes on the rich. And then the phase-out starts at $242,000 of income, the Roth IRA starts phasing out for a married couple. At $252,000, you're completely locked out. The single best retirement account in the tax code, and you make too much to use it the normal way. Now, there is a workaround, and I'm going to show you that, but look at the pattern here. The higher your income goes, the more the code shuts you out. And it just keeps going. Cross $400,000 as a couple, and the child tax credit, which is $2,200 per kid right now, starts phasing out [music] as well. Education credits, student loan interest, rental loss allowances, you lost those way back around $150 to $200,000. The tax code is full of benefits, and at your income, you're phased out of almost all of them. Now, here's the part that almost nobody sees coming. Your withholding stops keeping up with what you actually owe. When you get a bonus or RSUs vest, your company withholds federal tax on that money at a flat 22%. That's the standard rate for bonuses and stock, and it's the same 22% whether you make $90,000 per year or $900,000 per year. But a household at $450,000 is in the 32% bracket. So, every bonus dollar and every vested share is under withheld by 10 full points. And nothing gets withheld for those two extra taxes that I just showed you. Nothing. Let me show you the math on that as well. Say $80,000 of RSUs vest this year, your company withholds 22%, which is $17,600.

3:03 And on paper, everything looks handled. But in the 32% bracket, the real tax on those shares is $25,600. That's an $8,000 gap, and it builds all year long with every vest. Add a bonus that got the same 22% treatment and the extra taxes nobody withheld for, and now you know exactly why you write a big check every single April. It's never just bad luck, it was just math that nobody showed you. Now, there is a quick fix on the withholding piece because this one's easy. File a new W-4 with your employer, and add a flat extra amount on line 4C, extra withholding per paycheck. It doesn't lower your taxes at all, but it spreads the pain across the year instead of hitting you with one giant check in the spring. For a lot of people, the surprise is the worst part, and this kills the surprise. While we're on RSUs, one more important thing that people get wrong is holding onto vested shares doesn't save you any tax. The tax happened the day they vested at your regular income rate, whether you sell or not. So, holding is just choosing to keep a big bet on one stock, which also happens to be on the company your paycheck depends on. Selling at vest and diversifying isn't a tax mistake. For most people, it's a cleaner move. Talk to someone about your specific situation, but don't hold shares because you think selling triggers some extra tax. It It doesn't. But, honestly, the withholding gap and the extra taxes are the small problem. Because while that was happening, something bigger was going on. The advice you've been following stopped being enough. And that one costs way more over a lifetime.

4:06 Let's get into act two, which is standard advice stops being enough. Think about the standard money checklist everybody learns. Get the 401k match, max the 401k, maybe a Roth, pay extra on the house, and it's done. Now, I want to be fair. That's genuinely good advice for a household making $120,000. Now, watch what happens at your income. The 401k max this year is $24,500. For someone making $120,000, maxing [music] it means saving 20% of their income. Now, for a $350,000 household, that same max is 7% of your income. 7%. [music] You did everything the checklist said, you feel responsible, and you're saving 7%. This is where people get it wrong. They think maxing the 401k means they're done. At your income, that's barely the starting point. Now, remember what I said at the top, that more income is just more of the same. This is exactly where that breaks. At the median income, maxing your retirement accounts basically is the whole plan. At your income, you can check every box and still have 80 to $100,000 per year of savings capacity with no plan attached to it. And money with no plan doesn't just sit still, it [music] gets spent.

4:54 Here's what happens in real life. Let's say you get a $60,000 raise. After federal tax, extra Medicare tax, and state tax, roughly half of it actually hit your bank account. Let's call it $30,000. And then the bigger house takes $15,000 per year of it, the second car takes $8,000, the nicer trips take the rest. 12 months later, the raise is gone. Your savings rate didn't move, and nothing feels different except the bills are bigger. Nobody in the story feels reckless while it's happening, but everything still feels affordable. And that's exactly what makes it dangerous. This is what we see in the actual returns. So, let me give you two real households. Household one makes $150,000. They max one 401k, they put $500 per month into index funds, and they drive a paid-off car. 15 years of that and normal market returns puts them somewhere around $750,000. Now, this is nothing fancy, just the same moves on repeat. Now, household two makes $400,000. They max out one 401k, and that's the whole plan. Everything else went to a jumbo mortgage, two leases, and a lifestyle that grew to fit the paycheck exactly. 15 years later, they got the 401k, some home equity, and honestly not much else. Now, really sit with that for a second. Household two out-earned household one by $250,000 per year every year and still ended up being behind. So, here's the number one thing that tells you which household you are.

5:52 It's not your income, your savings rate into actual investments. If you're above $350,000 and less than 20% of your gross income is going to investment accounts every year, the money is getting absorbed somewhere else. And you're one flat decade away from being the highest paid broke person that you know. If you want that 20% in dollars at $350,000, it's $70,000 per year going into investments. And I know that number sounds heavy, but I also know plenty of households doing it at this income without feeling squeezed because the accounts are about to show you do a lot of the work with pre-tax dollars. The government can help you fund your savings rate. You just have to put the money in the right accounts. And the households that actually hit that number all do the same boring thing. They automate it. The 401k comes out before the paycheck lands, the investment transfer goes out the day after payday automatically before anyone can spend it. Because nobody saves $70,000 per year on willpower. They save it because the money moves before they ever see it. And the lifestyle builds itself around what's left. That's really the entire trick and it works at every single income. Now, before we get into the playbook, this week I'm posting a free live masterclass where I'm going to go way deeper on everything in this video.

6:44 That's your taxes, the phase-outs, and the exact account stack for households over $250,000 with the math on screen the whole way. And because it's live, you can ask me your questions directly, your income, your state, your situation. That's the part of YouTube video can't do. The link to register is in the description and in the pinned comment. So, you can grab your seat, it's free, and then come right back because the playbook starts with an account that most people at your income think they can't use anymore. Now, here's the third shift and this is the one that separates wealthy from the well paid. Below $300,000, the game is earning. Above it, the game is structure. Your income stops being the thing that makes you rich. What you do with it and what the IRS gets to touch becomes the whole game. So, let me give you the actual list for high-earning W-2 couple in order with this year's real numbers. Number one is both 401ks maxed, not one, both. That's $24,500 each or $49,000 per year between you plus whatever your employer's match. And I'm going to tell you right now, this is the most common miss we see in actual returns. One spouse maxed, the other one sitting at 5% because that's what gets the match. In the next video, I'm going to show you a real return where the one gap was costing a family over $4,000 per year. Number two is the HSA if you're in a high deductible health plan. $8,750 for a family this year. This is the only account in the entire tax code where the money goes in untaxed, grows untaxed, and then comes out untaxed when you spend it on medical costs. Every other account gives you two out of three at best. And if you already have an HSA, log in this week and check if the money is actually invested. About nine out of 10 HSA accounts in this country [music] have nothing invested.

7:56 The money just sits in cash. Opening an account was step one. Investing what's inside it is actually what builds wealth. Now, number three is the Roth workaround that I promised. You're locked out of the front door, but there's a completely standard two-step called the backdoor Roth. You contribute to a traditional IRA and then convert it to a Roth. $7,500 per person this year. That's $15,000 as a couple growing tax-free forever. Now, there's one warning though. If you already have big pre-tax IRA balances sitting somewhere, this gets messy because of something called a pro rata rule. Check that first or have someone check it for you. And number four is the big one. Some 401(k) plans usually at the exactly the kinds of companies paying these salaries let you contribute past the normal max up to total ceiling of $72,000 this year and then flip the extra into Roth. It's called a mega backdoor Roth. And whether you can do it comes down to two phrases in your plan documents. After-tax contributions and in-service conversions. I made a full video on how to check your plan in about 5 minutes. So, let's add it all up. Two 401(k)s, $49,000. Family HSA, $8,750. Two backdoor Roths, $15,000. That's $72,750 per year before we even touch the mega backdoor Roth. With it, a two-earner household can put over $100,000 per year into tax-advantaged accounts legally every single year. And look at the immediate payoff. If you take the 401(k)s pre-tax, the first $57,750 [music] of what's that comes off your taxable income, which is in the 24% bracket, is about $14,000 off this year's tax bill.

9:08 That's what shows up on the return. You don't have to do anything exotic. You just move money you're already saving into the right accounts. Once those are all full, the overflow goes into a regular brokerage account invested tax efficiently. That's a whole system. It's not complicated. It is never shown to people at your income because you're 4% of the audience and everything online is written for the other 96%. And one more thing, and this is the part that explains why April keeps surprising you. Your tax return isn't just the final score. The game ends December 31st. Every single move I just showed you has to happen during the year, and this is the biggest misunderstanding the high-earners have about their CPA. Your CPA files were already happen. That's a service you pay for, and most of them do it well. Planning and deciding what happens next is a completely different job, and most finally relationships don't include it. Nobody's cheating you, there's just nobody on your team doing this part, which means the calendar matters more than people think. Almost everything on that list has a December 31st deadline, except the IRA moves. If you're watching this in summer or fall, you still have time to change this year's number. If you're watching this in March, you're planning for next year, because this year is already locked.

9:59 Here's the one thing that you can do this week. Pull up last year's return, find the total tax line, and divide it by your total income. Write that percentage down. That's your effective tax rate. Every real plan starts with it, because you can't fix what you've never measured. If you run that number and it bothers you, that's exactly what this week's free live masterclass is for. I'm going to walk you through how these accounts, plus a few strategies that didn't fit in this video, stack together for households in the $250,000 to $500,000 and above range. It's going to be live, and you can ask me your questions directly. The link to save your seat is in the description. And to be clear, this video is education, it's not advice for your specific situation. If you like this video, make sure to give it a like, and I'll see you in the next one.