Finance 101 December 2024
In December the financial advisors at Ruedi Wealth Management wrote four more columns for The News-Gazette’s Business Extra section. Make sure to look for them every Saturday in the weekend edition of the paper, but in case you missed any in December all four are below.
Mega Backdoor Roth Contributions
Paul R. Ruedi, CFP®
For high earners looking to supercharge their retirement savings and maximize tax advantages, making Mega Backdoor Roth IRA/401(k) contributions is an exceptional strategy. It allows certain high-income individuals to contribute far more to a Roth IRA than the standard limits. While it’s not available to everyone, for those who qualify, it’s a game-changer for building tax-free retirement wealth.
In 2025, the total annual contribution limit for workplace retirement plans, like 401(k)s, is $70,000 for people under 50, $77,500 for those aged 50 and older due to a catch-up allowance of $7,500, and $81,250 for those ages 60-63 due to a catch-up allowance of $11,250. This limit includes employee contributions, employer matches, and after-tax contributions. Mega Backdoor Roth contributions leverage the after-tax portion of this limit to funnel extra savings into a Roth account.
To pursue this strategy, you start by contributing the standard pre-tax or Roth 401(k) maximum of $23,500 (or $31,000 if you’re over 50 or $34,750 for those ages 60-63), you make additional after-tax contributions to your 401(k) plan. Depending on your employer’s plan and matching contributions, you can contribute the remaining balance up to the annual limit. For example, if you max out your contributions and your employer contributes $10,000 in matches, you could contribute up to $36,500 in after-tax dollars.
Once the after-tax contributions are in the 401(k), you can roll them over into a Roth IRA or convert them within the 401(k) plan itself if your employer allows in-plan Roth conversions. The key advantage of this is that once contributions are in the Roth IRA or Roth 401(k), these funds grow tax-free and can ultimately be withdrawn tax-free provided all the rules are followed. Another key advantage is that Roth IRAs and Roth 401(k)s are not subject to required minimum distributions, which provides more flexibility when withdrawing funds in retirement.
However, the strategy hinges on employer plan rules. Not all 401(k) plans permit after-tax contributions or in-plan Roth conversions, so before diving into this strategy make sure to consult your employer’s 401(k) plan documents. Additionally, managing the tax implications of any earnings on after-tax contributions before conversion requires careful planning to avoid surprises.
Mega Backdoor Roth contributions are ideal for high earners who’ve maxed out other retirement contributions and have extra income to save. If you need help figuring out if making Mega Backdoor Roth contributions is a good strategy for you, you may want to talk to a financial advisor.
Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
Health Savings Accounts
Ryan Repko, CFP®
A health savings account, or HSA, is an account that enables you to set aside tax-free money that can be used for qualified medical expenses. The money can be held in cash, or invested in stocks or bonds. In order to save money in an HSA, you must have a high-deductible health insurance plan (HDHP), defined as a plan with a deductible of at least $1,650 for an individual or $3,300 for families. In 2025, an individual can contribute $4,300 into an HSA, while a family can contribute $8,550. People who are 55+ can contribute an extra $1,000 “catch-up” contribution per year.
Health savings accounts are special from a tax perspective because they offer a rare triple tax advantage. First, contributions are made tax-free because they are either excluded from your taxable income up front, or they are added as a deduction from your tax return when you file your taxes. Second, any interest or growth in the account accrues tax-free. And third, funds can be withdrawn tax-free if they are used for qualified medical expenses - and this list is quite broad.
Any withdrawals that are not used for qualified medical expenses are subject to income taxes and a 20% penalty for people under age 65. However, if you are 65+, the 20% penalty is eliminated, and any non-healthcare distributions are only subject to income taxes. For this reason, the HSA is sometimes referred to as a “stealth IRA” because it can eventually be used to purchase anything. For people who do not need to use their HSA money to pay their yearly healthcare costs, it can be another tax-advantaged savings account.
For most people, contributions to HSAs are generally best held in cash to cover short-term healthcare expenses. Though investing in an HSA to save for future medical expenses has tax benefits, you should only invest an amount you won’t need in the short-term, because there is always risk when investing. To keep yourself out of trouble, remember that this is a health savings account first and foremost.
You shouldn’t choose a high deductible health plan just to be able to contribute to an HSA. These plans are a good deal for people whose costs won’t reach their high deductible, but it will likely be more financially beneficial for people with high health care costs to choose a plan with a lower deductible to save on out-of-pocket expenses. If you are not sure if a high deductible health plan combined with an HSA is the right option for you, you may want to talk to a financial professional.
Ryan Repko is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
In the Face of Adversity
Paul R. Ruedi, CFP®
I have been the owner of the same Ford Mustang for nearly 20 years. Though it is getting up there in age, the sentimental value the car has is impossible to measure, and I want to keep it on the road as long as possible. So recently I decided to get some work done on the car, and the whole experience has really driven home why you need an expert to take care of complicated issues you can’t remedy yourself.
I’ve been to many auto repair shops to get repairs done over the last couple decades. But this project was different. The car needed a major overhaul of all the steering and handling components as well as a new clutch and flywheel. I got a great recommendation and ended up at the best shop in the entire Dallas-Fort Worth metroplex. I am extremely glad I did.
Though the suspension overhaul initially went smoothly, the shop hit some major adversity when it came time to replace the clutch. What was seemingly a straightforward job was made much more complicated by 20-year-old parts that were completely stuck together and required a blowtorch to cut off. With the clutch taken care of, they took it for a test drive and noticed a slight vibration coming from the front of the car. They had to swap out multiple parts over multiple days to figure out the culprit.
What everyone thought would be a fairly simple project that would be done in a couple days required two weeks of unexpected troubleshooting. I am extremely thankful the car was in the hands of experts who knew exactly what they were doing for that entire process. Most shops, even good ones I have worked with, could not have overcome all the issues they did. I couldn’t help but think how this is similar to retirement planning.
Retirement planning is very easy when things are running smoothly. When the market goes up 30% it is very easy to be a retiree and investor. But what about when you face adversity? What happens when the market is down 50% and you need to figure out what adjustments to make to ensure your finances survive intact. What happens when you have a major medical issue that throws a wrench in your finances?
When that time comes, you’ll wish you had the very best looking out for your retirement. I’d highly recommend you find that person before adversity arises. If my experience with my car has taught me anything, you’ll be very glad you did.
Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
Lessons from 2024
Paul Ruedi
As each year draws to a close, I like to look back on the year and think of lessons we can learn from it. Though the stories are always different, the lessons we learn from them are often the same. As I think back on 2024, I can think of two important stories that had a lot to teach investors.
After increasing by over 25% in 2023, the S&P 500 index made a new all-time-high in January. Though all-time-highs should be celebrated, they often make people nervous that stocks are going to fall and give those gains back. It would have been very tempting for investors to see how much they were up and simply want to “take profits.” It would have been very tough for investors who were waiting on the sidelines to jump into the stock market after such a strong run.
But those who sat on the sidelines for 2024 paid a serious price by missing out on another year of staggering returns, with the S&P 500 index up 24% since the start of the year. Huge return years like this year are impossible to predict, so you have to remain invested at all times. If you are waiting for the perfect opportunity to invest, you may wait forever and miss out dearly. This is going to be an important lesson for investors to remember.
This year also included an election season that was… interesting, to say the least. With the outcome of the election uncertain, investors on either side of the political spectrum were equally likely to experience anxiety and fear about the future. It was very tempting for people feeling this level of fear to want to sell their stock investments until the election was decided.
Investors who bailed out of their investments due to their political worries missed out on returns that were simply there for the taking. This is why you can’t let politics impact your investment decisions. The great companies of America and the world will continue to innovate ways to make money and pass some of it along to investors regardless of who is in office.
The lesson from both of these stories is that you just can’t time the market. People intuitively know it, but then a perfectly normal year like this one gives them two emotionally compelling reasons to try it. If you find you are tempted to time the market, you may want to consider working with a financial advisor.
Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.
*Disclaimer: Past performance is no indication of future results. You should not make any investment decisions without first performing your own due diligence and consulting your financial advisor.