ASK A FINANCIAL PLANNER: ‘I’m sitting on a lot of extra cash — what do I do with it?’

Wealthy suit

Certified financial planner Sophia Bera answers:
I have a high-earning job, and, to be frank, a ton of extra cash (think hundreds of thousands). What should I do with it?

Wow! Way to go! You are doing a great job of maximizing your earnings while also living significantly below your means. I’m assuming that you don’t have any debt and that you’ve set aside at least three months of net pay in an online savings account.

One challenge is going to be figuring out how you can lower your tax bill since you’re a high income earner. I would start by interviewing a few tax accountants and finding one to work with that can help you navigate through your tax situation in addition to hiring a financial planner that can show you how all the financial pieces work together.

I recommend that you have an accountant review your tax return because higher income earners are often subject to AMT (Alternative Minimum Tax) and you want to make sure that your taxes were calculated correctly if you did them yourself.

I would also request a copy of your company benefits from your HR department. Often times, I can save my clients a few hundred to several thousands of dollars per year just by taking advantage of their employer benefits. Here a few things to find out:

Am I maxing out my 401(k)? This is one of the best ways to reduce your taxes because you contribute with pre-tax dollars. The maximum contribution is $18,000 per year. Many people think they are “maxing out” their 401(k)s when they are simply contributing enough to get the full company match. Regardless of how much your employer contributes, as an employee you can contribute $18,000 per year. A 401(k) is funded with pre-tax dollars, so this is a great way to lower your tax bill. You can usually increase your contributions throughout the year.

Do I have a High Deductible Healthcare Plan (HDHP) with a Health Savings Account (HSA)? If you do, you’ll want to contribute the maximum to this account as well. For individuals, the max is $3,350 and for a family plan the max is $6,750 for the 2016 calendar year. These are pre-tax dollars that can be used to pay for healthcare costs and rollover from year to year. You can also invest the money in your HSA and some financial planners actually have their clients use HSAs like an IRA.

If I can’t contribute to an HSA, do I have a Flexible Spending Account (FSA)? You can contribute up to $2,550 to an FSA for Health care and $5,000 to an FSA for Dependent Care.

What other benefits does my company offer? Are you taking advantage of commuter benefits, short term disability, long term disability, life insurance, and any other benefits that might be pre-tax which can help lower your tax bill? Make sure you are.

Sometimes companies offer a Deferred Compensation plan for higher income earners at the company, where you can defer a percentage of your salary. Since you don’t need to money right now, I would highly recommend that you do that.

After taking advantage of all your company benefits, you can also contribute $5,500 to a non-deductible IRA each year. The benefit is that you don’t have to pay taxes on the growth of the earnings until you withdraw the money in retirement.

Set aside at least three months of net pay for emergencies. I think Ally Bank is a good place to stash cash because their current interest rate is 1%.

Now, it’s time to open a brokerage account at a discount brokerage firm like Vanguard, Betterment, Schwab, or Fidelity. You may want to invest this money more conservatively than you would your retirement assets if you think you might tap this account for other goals. This money is very flexible because you can access it at any time, and just need to pay taxes on the gains.

What kinds of organisations are you passionate about? If you are charitably inclined, you should consider opening a Donor Advised Fund. You receive an upfront tax deduction on the money you contribute to the fund in the current tax year and then you can decide which charities you’d like your money to be allocated toward over the next several years.

It sounds like you have a great income currently, but it could also be a high stress job, so make sure you’re taking care of yourself while you’re raking in the cash. It’s a great time to set yourself up for options and flexibility in the future if you decide you don’t want to work the corporate job anymore — that’s why putting your money into a brokerage account is so important.

Maybe you dream of starting your own business, or spending a year in Barcelona, or you want to take six months off to travel the world? Then check out the Runway Calculator my friend, Nat Eliason, put together to help people figure out how much money you need to support yourself in other parts of the world.

Regardless of your goals, you’re at the stage where you could really benefit from talking to a financial planner, so that you can use your money to create a life you love.

This post is part of a continuing series that answers all of your questions related to personal finance. Have your own question? Email yourmoney[at]businessinsider[dot]com.

Sophia Bera, CFP® is the Founder of Gen Y Planning and has been quoted in The New York Times, Forbes, Business Insider, AOL, The Wall Street Journal, and Money Magazine. She tweets, travels, and loves helping millennials manage their money more effectively. Curious? Sign up for the free Gen Y Planning Newsletter.

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