Case Study

• Self-employed
• S-Corp
• Retire early 
• Provide for kids' education.
• HSA

After our discovery call in 2023, we quickly discovered we'd be a good fit to work together. Chris and Amy are in their mid-late 40s. They have two kids, Maverick (age 14) and Lily (age 11), and Amy stays home. They wanted to provide $20k to their kids' education after high school, whether college or a trade school. They also wanted the benefit to be in today's dollars and inflate it to keep up with the benefit. Chris is the primary source of income. 5 years ago, he made a job change from a store manager to a realtor. His business took off and, in 2023, made roughly $230k. He's a self-employed contractor with a brokerage firm in Spokane, technically the only person in his business. At his old job, he had a 401k with about $350k that we rolled over to an IRA. Amy had a brokerage account with roughly $175k. Chris's goal is to retire at 55. They can contribute a lot toward retirement but need to figure out the best way to do it and how much they need to put away to hit their goal of retiring at 55.

1. Kid's Education: After sitting down, we identified some opportunities for improvement in Chris and Amy's current plan. They didn't know how much they needed to save to retire at age 55 or put toward their kids' education.
2. Retiring Early: They also were worried about penalties for distributing from retirement accounts before age 59.5.
3. Retirement Contributions: After Chris left his job, he lost the ability to contribute to his 401k. He was planning to open an IRA as an alternative, but the IRA has smaller contribution limits, $6,500 for 2023.
4. Medical Expenses: They also paid out of pocket for medical expenses despite having a high deductible health insurance plan.

1. On Track for Retirement: We asked Chris and Amy for detailed financial and tax information after the first meeting. Once we got it back and developed a plan and recommendations, we sat down to give our recommendations. Using the budget they gave, we figured out how much they would need to cover in yearly retirement expenses. We altered some budget numbers based on our expertise in looking at many other budgets and were able to eliminate and add missed expenses. We inflated the number to their retirement target date (age 55). Using a conservative 3% distribution, we calculated how much they needed to save, roughly $2.7 million. Starting with $525k in investments, we let them know they'd need to save $59,184 yearly for the next 13 years to reach their goal, assuming an average of 8% return. If they make more, it'll be more financial safety or an earlier retirement. 
2. S-Corp Election: We had Chris set up his business as an S-Corp, so he utilizes the tax savings on anything above his personally given salary as an owner's distribution. He didn't have to pay the 15.3% tax on the self-employment tax portion of his owner's distribution. He set his salary as $60,000 and took the rest of his profit as an owner's distribution. This saved him over $26k in tax in 2023 (and a similar amount yearly).
3. Retirement Contributions: We set up an individual 401k with no start-up cost and allow him to contribute as an employee and employer. He deferred $44,609 into the plan at the 24% tax bracket; this saved him over $10k in taxes. For the remaining $15,000 to them up to the $59k retirement contribution goal, we made backdoor Roth IRA contributions for Amy (that avoids contribution income limits) and the remaining $8,500 in her brokerage account.
4. Avoiding Withdrawal Penalties: One of Chris and Amy's concerns was the penalties for withdrawing from retirement accounts early. We laid out distribution strategies from their tax-deferred accounts at age 55. They can make Substantially Equal Periodic Payment (SEPP) with their IRAs and avoid penalties altogether. The plan is to evaluate the three distribution options when we retire.
5. Kid's Education: We also calculated the future value of his kids' education to determine how much they needed. They began monthly contributions into two 529 accounts: $488 into Mavericks and $311 into Lily's 529.
6. HSA Opportunity: After looking into their situation, we recognized another tax opportunity. They had a high-deductible health insurance plan and were using savings to pay for $3k of healthcare expenses. We set up an HSA account, which allows them to save taxes on contributions (up to $7,750 for 2023), invest the money, and withdraw it tax-free for healthcare expenses. At the 22% tax bracket, it'll save them $660 each year.

1. Tax Strategy: Since we started working with Chris and Amy a year ago, we have saved them over $35k in taxes using an S-Corp and an individual 401k (and will continue to do so yearly). They also use an HSA to pay healthcare expenses and reduce federal income tax.
2. Retirement: They are on track to retire at age 55, and we've developed a strategy to avoid early withdrawal penalties. They can still contribute to a Roth IRA through a backdoor Roth IRA strategy even though their income is past the limits. 
3. Education: In today's dollars, they are on track to provide $20,000 in tax-free education help for their kids.
4. Estate Security: Since working together, we've done estate planning with a local attorney we like. We've prepared Chris and Amy's accounts, estate, and investments for unforeseen life events. They enjoy retirement, using their RV to visit all the US national parks and spending time with their children and grandchildren.