How our finances have changed as W2 earners

Here’s how things changed for us as W2 earners well into our careers.

We max out every tax advantaged account. It no longer is a tradeoff of which accounts to prioritize. We just identify all possible tax advantaged asset locations and max them out ASAP. In 2024 we maximized our megabackdoor 401Ks, backdoor Roth IRAs, and HSAs.

Rebalancing without selling. We effectively just point income anywhere that needs attention. This lets us rebalance our portfolio without selling anything — most importantly to us our percent equities vs. bonds and our percent US vs. international.

Keeping a very low cash reserve. We do not have an emergency fund. We do not feel the need to keep a significant cash position in case of emergencies. We can draw on years worth of expenses in the form of a cheap margin loan if necessary. This is even despite having a considerable burn rate. We know the math and are comfortable taking the risk.

Set up automatic margin withdrawals. Our cash management account will automatically deduct from the margin balance in our brokerage if a debit would have made the account go to zero. This way we never have to keep extra cash in our account because we’re afraid of hitting zero unintentionally. This makes not having an emergency fund more palatable, because we have a very fat buffer of margin to draw from if we need to go into the red for a few days. Best of all this happens automatically so we really don’t need to stay on top of things and worry at all if our account is close to zero.

Not generating capital gains for any reason. We have a position in company stock from RSU vests that we would like to diversify. Since our effective long-term capital gains tax rate is around 34%, the tax hit outweighs the benefits of diversification at this point. Once I leave the company and am no longer bound by its trading policy, I plan to still not sell the position, but instead use it as collateral to rebalance into an index fund. I will only put at risk the amount I would have lost to taxes anyway. I will write more about this when I implement it.

Never withdrawing anything from our HSA. Because the account is triple tax-advantaged, we just don’t touch the funds at all and pay everything out of pocket.

Donating only appreciated shares, not cash. This raises our overall cost basis across our portfolio.

Things we’ve considered but are not doing

More exotic ways of reducing W2 taxable income:

• Real estate professional status allows you to write off depreciation on W2 income, but this requires over 750h per year to achieve for one spouse.
• Oil investing: too undiversified.
• Insurance (AUL, etc): almost never the right decision.

Direct indexing: we may consider this for new investments, but the complexity tradeoff is not worth it for us currently.

This is not financial advice.