3 smart things to do with your money when you start making 6 figures

3 smart things to do with your money when you start making 6 figures

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Making $100,000 per year should put three money moves on your radar.

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Making six figures is no small milestone for your career - or your financial life.

With a bigger paycheck should also come more saving and more investing. But, it also might mean bigger taxes, and a very different set of life plans than you had when you were making half your current salary - you might be thinking about starting a family or even retiring early once you get to this stage.


Making six figures is certainly exciting, but it requires a little bit more money management. Here are three moves you should consider making once you reach a $100,000 per year salary.

1. Increase your 401(k) savings

If you spent years prioritizing other financial goals, like paying off student loans or saving for the down payment on a home, you might want to consider putting retirement savings at the front of your priority list now that you've reached six figures.

"The six-figure mark is a great time to get serious about saving for retirement," says financial planner Sophia Bera of Gen Y Planning. "I use 15% as a rough estimate on what you should be saving for retirement," she says.

For an 401(k) (usually an employer-sponsored account) the maximum contribution in 2020 is $19,500.

In Bera's opinion, making six figures for the first time makes a great opportunity to max out your account. For someone making $100,000 and already saving 15%, increasing your savings by 4.5% to 19.5% would max out your 401(k). Doing this can drastically reduce your taxable income, helping you become eligible for a Roth IRA (more on that below), where you can keep saving.


2. Start a health savings account

Bera says a health savings account can be a great way to reduce your taxable income, start saving for future goals, or add extra to retirement savings.

Health savings accounts are generally available to anyone who has an eligible high-deductible health insurance plan. In 2020, $3,550 is the maximum contribution for a single person, while $7,100 is the maximum for a couple or family.

Any money you put into a HSA is a pre-tax contribution, which means it lowers your tax bill.

Plus, your HSA is more than a savings account - it also can act like an investment account. Since the money you put in an HSA rolls over from year to year, "you can use that account as another investment or like a retirement account," says Bera. "I have a lot of clients that aren't touching their HSA, but are maxing it out every year and using it like an IRA for medical costs closer to retirement when they expect those costs to be greatest."

She continues: "And, when people hit that six figure mark, they're starting to think about having a family. This is a great time to start maxing out your HSA if you know you're going to be having a lot of out-of-pocket medical costs, like for labor and delivery."


3. Then, start contributing to a Roth IRA

If you're making six figures, you're getting close to the income limit for a Roth IRA - a type of retirement account that allows tax-free distributions. A single person making $139,000, or a couple making more than $206,000 combined, is no longer eligible for a Roth IRA.

But, Bera says there are a few workarounds. "If you max out your 401(k), you're lowering your taxable income for the year and you might actually still qualify for a Roth IRA," she says. The same goes for a health savings account.

For example, if you made $140,000 per year, you wouldn't qualify for a Roth IRA. But, subtract the maximum 401(k) contribution of $19,500, and suddenly your taxable income is $120,500 - making your income suddenly eligible for a Roth IRA.