BudgetDog Academy students bring their most pressing financial questions to weekly open Q&A calls with Brennan Schlagbaum — a licensed CPA — and his team. These are not hypothetical questions. They are real situations students are navigating with real money, real accounts, and real consequences for getting it wrong.
Recent calls covered 401k rollovers, the tax implications of brokerage withdrawals, HSA eligibility, teacher retirement systems, tax benefits to capture, custodial accounts for kids, when an HSA makes more sense than a 401k, and how W-2 income affects your investment strategy.
Here is a clear, practical breakdown of each topic.
How a 401k Rollover Works — and What to Know Before You Do One
A 401k rollover is the process of moving retirement funds from a previous employer’s 401k plan into a new account — typically an IRA or a new employer’s 401k. Done correctly, a rollover is a tax-free transaction. Done incorrectly, it can trigger income taxes and a 10% early withdrawal penalty.
Follow these steps to execute a rollover properly:
1. Request a direct rollover. Ask your old plan administrator to send the funds directly to your new account. This avoids the 20% mandatory withholding that applies to indirect rollovers.
2. Do not take possession of the funds. If the check is made out to you rather than the new custodian, you have 60 days to deposit it — and you will need to replace the withheld 20% out of pocket or it counts as a distribution.
3. Confirm IRA or plan compatibility. Traditional 401k funds roll into a Traditional IRA. Roth 401k funds roll into a Roth IRA. Mixing these incorrectly creates taxable events.
4. Check for outstanding loans. If you have an outstanding 401k loan, it may become due when you leave the employer. Unpaid balances can be treated as distributions.
5. Review the new plan’s investment options and fees. Rolling into an IRA often provides more investment flexibility and lower-cost options than a new employer plan.
A rollover is not automatic. It requires intentional steps — and the wrong move has lasting tax consequences.
Tax Implications of Brokerage Withdrawals
Withdrawing from a taxable brokerage account is different from withdrawing from a retirement account — but it still carries tax implications.
When you sell investments in a taxable brokerage account, you trigger a capital gains event. The tax rate depends on how long you held the investment:
– Short-term capital gains apply to assets held less than one year. These are taxed at your ordinary income rate — the same rate as your W-2 income.
– Long-term capital gains apply to assets held more than one year. Rates are 0%, 15%, or 20% depending on your taxable income.
Therefore, the timing of when you sell matters. Holding an investment for more than one year before selling can significantly reduce your tax liability. Additionally, tax-loss harvesting — selling losing positions to offset gains — is a strategy worth understanding if you have a brokerage account with mixed performance.
How Contributions Get Impacted by Other Financial Moves
This is a question that surfaces often — and the answer depends on which account and which moves are in play.
For example, contributing to a Health Savings Account (HSA) can reduce your taxable income, which may impact your ability to make a deductible Traditional IRA contribution depending on your income level and workplace retirement plan access. Similarly, converting funds from a Traditional IRA to a Roth IRA increases your taxable income for that year, which can affect eligibility for certain credits and deductions.
The core principle is this: your financial moves do not happen in isolation. Each decision affects your adjusted gross income, your modified adjusted gross income, and downstream eligibility for other tax benefits. A coordinated financial plan accounts for all of these interactions.
How to Determine HSA Eligibility
Not everyone qualifies to contribute to a Health Savings Account. To contribute to an HSA in any given year, you must meet all of the following criteria:
– You are enrolled in a High Deductible Health Plan (HDHP) as defined by the IRS.
– You are not enrolled in Medicare.
– You are not claimed as a dependent on someone else’s tax return.
– You do not have other health coverage that disqualifies you — including a general-purpose Flexible Spending Account (FSA) held by you or your spouse.
Eligibility is determined month by month. However, if you are eligible on December 1st of a given year, the last-month rule allows you to contribute the full annual limit — provided you remain HDHP-eligible through the following December.
How a Teacher Retirement System Fits Into an Overall Financial Plan
Teachers and other public employees covered by defined benefit pension plans — like CalSTRS, CalPERS, TRS, or STRS — face a planning challenge that is different from employees covered only by 401k-style plans.
A defined benefit plan pays a guaranteed monthly benefit at retirement based on a formula — typically years of service multiplied by a percentage of final salary. This is meaningful income that does not depend on investment performance.
However, many of these systems do not include Social Security coverage. Additionally, the pension may not fully replace pre-retirement income, particularly for employees who retire early. As a result, additional savings — through a 403b, 457b, or Roth IRA — are often necessary to bridge the gap.
The key is understanding exactly what your pension formula produces and when, then building supplemental savings around that number.
Tax Benefits You Should Be Taking Advantage Of
There are several tax benefits that are commonly overlooked — especially by people who do not work with a CPA:
– Traditional IRA deduction — available to qualifying taxpayers who do not have access to a workplace plan or who fall below income thresholds.
– Saver’s Credit — a credit of up to $1,000 for eligible low- and moderate-income taxpayers who contribute to a retirement account.
– HSA deduction — contributions are above-the-line deductions, meaning they reduce your taxable income even if you do not itemize.
– Self-employment deductions — those with side income may qualify for the QBI deduction and deductions on self-employment tax.
– Child and dependent care credit — available for qualifying childcare expenses when both spouses work.
Investing for Kids Through Custodial Accounts
A custodial account — also called a UGMA or UTMA account — allows a parent or guardian to open and manage an investment account on behalf of a minor. The account transfers to the child when they reach the age of majority.
Key points to understand:
– Contributions are made with after-tax dollars and are not tax-deductible.
– Investment gains are subject to the kiddie tax rules — the child’s investment income above a threshold is taxed at the parent’s rate.
– Funds in a custodial account count as a student asset in financial aid calculations, which can reduce aid eligibility more significantly than a parent-owned 529.
– Unlike a 529, funds in a custodial account can be used for anything — not just education.
Custodial accounts are a useful tool in the right context. However, the choice between a custodial account and a 529 depends on the intended use of the funds.
When an HSA Makes More Sense Than a 401k
For most people, the recommended order of retirement account contributions is: employer 401k match first, then HSA, then Roth IRA, then back to 401k. However, the HSA deserves particular attention because it offers a triple tax advantage that no other account can match.
Contributions reduce taxable income. Growth is tax-free. Withdrawals for qualified medical expenses are tax-free. Additionally, after age 65, the account functions like a Traditional I.