Planning for travel requires a lot more flexibility than traditional financial planning focused on retirement. Maxing out your 401(k) or IRA is great, sure, but it’s not the best strategy if you want to be able to use the money before age 59 ½.
But don’t fret – there are LOTS of creative ways to save for a sabbatical besides just putting money away into a high yield savings account or Certificates of Deposit (CDs).
Our job is to help our clients save for their sabbatical the savviest way possible based on the account types they are eligible for. Our favorite strategy includes filling up your account buckets to maximize tax-efficient savings and flexibility.
So without further ado, here are our three best travel savings accounts for US readers.
#1 Best Travel Savings Account: Employer Stock Plans
Many of our clients work for publicly traded companies that offer equity compensation, which gives you access to company stock at a discount. This can often come in the form of stocks options or restricted stock. Employee stock purchase plans are also very common for large corporations.
Why We Get Excited about Company Stock:
- Lots of flexibility – you’re not locking your money into a retirement account that is subject to early withdrawal penalties
- Any gains are subject to the reduced capital gains tax rather than ordinary income tax as long as the shares have vested and have been held for at least 12 months
- You can decide if and when to sell the stock based on how it’s performing, your current tax situation, and when you need the money
- Using this strategy of selling off company stock to fund short-term savings goals can help reduce your overall company concentration risk
Savings strategy at work: In a simplified scenario, the strategy is to acquire company stock at a discounted price and then methodically sell it off once it’s subject to long-term capital gains rates. Depending on the type of equity compensation, there are different tax implications so it’s good to keep a spreadsheet that tracks type of equity compensation, important dates, share quantities, share prices, and date of sale.
The proceeds from the sale can then be reinvested into a more diversified portfolio that matches your sabbatical planning timeline and/or other savings goals.
The stock sell-off strategy can happen during any of these phases:
- While you’re still working if your sabbatical is in the very near future,
- While you are on your sabbatical, so you can take advantage of low income years and use the cash to fund your adventure, or
- To fund a future savings goal, like your reintegration back to “real life” when you return from your sabbatical
#2 Best Travel Savings Account: Taxable Investment Accounts (aka Brokerage Accounts)
EVERYONE is eligible to save to a taxable investment account. As long as you earn more than you spend, this is a great way to get the dollars you’re saving to work for you.
What Makes Taxable Investment Accounts So Cool:
- There is no contribution limit – you can save as much as you want in any given year
- There are no penalties to take money out before age 59 ½
- The account can be invested in a diversified portfolio with the appropriate level of risk to match your savings goals and timeline
- The liquidation of the investments within the account can be optimized to manage tax
Savings strategy at work: Any excess income above and beyond your emergency fund (which should always stay in cash), can be deposited into a taxable investment account to be invested. The investments inside the account (i.e. asset allocation) should be based on your risk level and timeline for your planned adventure.
The investments can be sold at any point to meet your cash needs (often we see it used to fund the sabbatical itself or to help cushion the transition upon return). Note: there are optimal ways to invest and sell-off investments as part of the drawdown strategy, but the thing we tell clients to focus on during the planning stage is first getting the account funded.
#3 Best Travel Savings Account: Health Savings Accounts (HSAs)
You can only contribute to an HSA if you are covered by a high-deductible health plan (HDHP).
We don’t give advice on which health insurance coverage to elect since we don’t know your medical history, but if you ARE enrolled in an HSA-eligible health plan, we like to see extra dollars go to this account type.
Maximum annual savings limits depend on whether you’re covered by an individual HDHP or a family HDHP. The maximum contribution amount may change year over year.
Why We Love the HSA:
- You get a tax deduction in the year that the contribution is made (it offsets current income)
- The account grows tax-free (not subject to capital gains or ordinary income tax – woohoo!)
- You don’t pay any taxes when the money comes out, as long as you are reimbursing yourself for any qualified medical expenses that you have already paid out of pocket (be sure to keep good records of your medical expenses)
Savings strategy at work: The idea is that you pay all medical expenses out of cash flow while you’re working. For example, do you plan to get Lasik before you head out? Use your paycheck to pay the expense and then reimburse yourself while you’re on your sabbatical to take advantage of the tax benefits of this account. Again, make sure you keep record of all your out-of-pocket medical expenses so you can utilize this strategy.
Note: HSAs are also commonly used to fund the later stage of retirement, since the medical expense reimbursement requirement ends at age 65 and the tax-free growth is best for long-term investing. So even though it’s always our first choice to save to the HSA, sometimes it’s not the account we advise drawing from during a sabbatical – each financial plan is unique based on the circumstances.
- There are many advanced savings strategies to fund your sabbatical that go above and beyond just putting money into a savings account
- Each situation is unique, so we always recommend consulting a financial planner and/or a tax professional to make sure the strategy works with your specific circumstance. This blog post is not intended to be personalized advice.
- Ready to work with a professional to design your savings strategy? Start the conversation today
To learn more about Middleton & Company, visit their website at middletonand.co