In recent weeks, we have spoken to many pilots regarding the new American Airlines contract. With that in mind, we thought we would proactively reach out to you and share the advice we gave these clients about how to best use increased compensation and upfront cash payments.
- Increase your 401(k) contribution. If you are not currently contributing the maximum amount to your 401(k), you can increase the amount you are contributing. In 2023, the 401(k) employee contribution limit is $22,500 for most employees and $30,000 for employees 50 years of age or older, including anyone turning 50 this year. Increasing your contribution into the end of the year to meet the maximum can be done by contacting your HR department.
- Backdoor Roth IRA Contribution. If you don’t have a large relative Traditional IRA balance (not including your current 401(k) balance), you may be able to make additional contributions to an After-Tax Traditional IRA, and then convert the balance into a Roth IRA (called a “Backdoor Roth Contribution”). This does not work as well for someone who has a large Traditional (Pre-tax) IRA because the conversion to a Roth looks at all IRA accounts pro-rata for tax purposes.
- Pay off high-cost Debt. Paying down debt with an interest rate above 5-6% can be a great use of cash. Think of it as a guaranteed return on investment at the rate of the loan.
- Fund 529 accounts. A 529 plan is a tax-advantaged saving plan designed to encourage saving for future education costs for a child or grandchild. The annual limit for contributing per beneficiary is $17k. Married couples filing taxes jointly can contribute up to $34k per year per beneficiary without it counting towards the lifetime gift tax exemption. If you have two children each with an account, a married couple can contribute up to $68k. Some states give a tax deduction for 529 Plan contributions as well.
- Invest in a taxable brokerage account. Investing outside of your retirement account is still recommended, even if you don’t get the same tax benefits.
Ultimately, if you are concerned about your finances, know that our team is here to help. We would be more than happy to sit down and share some recommendations we have, based on your unique financial situation. Reach out anytime.
Please keep in mind that we do not provide legal or tax advice. Your situation may be unique. Please consult your own attorney or tax advisor accordingly.