Getting Out of the High Earner, Not Rich Yet Cycle
When a person earns a substantial income, but does not have any assets to show for it are often known as “HENRYs.” HENRY stands for High Earner, Not Rich Yet. HENRYs need to know there are considerations when they decide to shift their focus from earning a higher income to building wealth.
Having knowledge regarding taxes including income tax and capital gains will be essential for a “HENRY.” When an asset grows, the asset will be subject to capital gains. Taxes for capital gains will vary. The capital gains vary depending on how long the asset was held, the individual’s income and filing status. When an asset was held for less than a year, the capital gains will be short-term and are taxed at the ordinary income tax rate. Assets that were kept for longer than a year will be long-term capital gains.
What is a HENRY?
An example of HENRY is a doctor who just started working in a hospital. The doctor in this scenario has student loans in the amount of $250,000.00 and little to no assets. The doctor earns approximately $200,000.00 a year, but has a negative net worth due to the $50,000.00 owing in student loans. Therefore, the doctor is “Not Rich Yet.” But due to the doctor’s income, the doctor is taxed in a higher tax bracket.
Investing sufficiently is crucial. This is why it is recommended to pay off student loans as soon as possible, that way a person can invest more sufficiently and gain a higher net worth.
How To Invest Your Money
Everybody including HENRYs need to know where to invest their money. There are different types of investment accounts they include, tax-deferred, tax-advantaged, and grow tax-deferred. Accounts that are tax-deferred are your normal retirement accounts such as 401ks and IRAs. Tax-deferred account will provide a tax deduction today and will grow tax-deferred. Further, tax-deferred accounts are taxed as ordinary income in retirement.
Meanwhile, tax-advantaged accounts are ROTH 401ks and ROTH IRAs. These types of accounts have no tax deduction when a contribution is made. The accounts contributions will grow tax-deferred and withdrawn tax-fee when in retirement. There are maximums that a person can contribute to these accounts.
Brokerage Accounts
Any of these accounts are meant to be long-term wealth builders for individuals. It is highly recommended to contribute on a regular basis to one of these types of accounts as well as to brokerage accounts. In a brokerage account dividends and interest are earned and taxed as earned. But distributions are not subject to ordinary income rates, but instead are subject to capital gains. When an individual continues to contribute to a brokerage account, they can shift the tax structure from being evaluated at ordinary income rate to ordinary income and capital gain rates. Capital gain rates are likely to be lower than ordinary income rates.
Having a brokerage account with investment accounts can be beneficial. When an individual wants to buy something that requires a loan to be taken out of an account, if funds are coming from an IRA, the money will be subjected to ordinary income tax which can interfere with Medicare.
Utilizing a brokerage account can come in handy in these types of situations. Brokerage accounts allow for the individual to have some flexibility when managing the tax impact. While contributing maximums to employer retirement accounts is a good goal to have, it will not guarantee sufficient savings for the high earner individuals.
Make Goals
Making and setting goals is a good way to accumulate assets. Having the correct investing and financial plan that works best for the individual is what should be strived for. Do not make the mistake of trying to keep your assets in one type of financial account, having a couple or more accounts that are different will be beneficial. Make more conservative and conscious decisions with your assets and accounts as that will go a long way for the future.
Setting up an annual savings goal may also be beneficial to those who want certain goals met. Remember to always pay yourself first.
For more information, please see article “Breaking Free from the ‘HENRY’ (High Earner, Not Rich Yet) Cycle” by Caitlin Frederick, on familylawyermagazine.com.
The attorneys at Kathryn Wayne-Spindler & Associates are experienced attorneys who change with the times to meet the needs of their clients. Contact the Milford, Michigan law office of Kathryn Wayne-Spindler & Associates at 248-676-1000 for assistance. Or contact our new location in Alexander City, Alabama at 800-809-9414. The attorneys of Kathryn Wayne-Spindler & Associates practice law throughout Southeastern Michigan primarily including Oakland, Wayne, Washtenaw, Genesee and Livingston counties. In Alabama Kathryn practices in primarily Lee, Tallapoosa, Macon, Chambers, Coosa and Elmore Counties.
