I’m 43 making $575k annually and we contribute $2,500 to investments each month – what mistakes am I overlooking?

A Midwest couple has amassed a $3 million net worth due to hard work and steady saving. The couple lives frugally but does go on a long vacation once a year. They run a business that grosses about $575k annually, and they reported $368k in personal income on their 2022 tax return.

Everything seems to be going well, but the couple is wondering if they’re being a bit too conservative. The husband posted on the Fat FIRE subreddit to explain their situation and ask for advice. They have $767k spread out over 2-3 high-yield savings accounts that earn between 4% to 5% APY. The money was in those accounts before the rate hikes.

The husband has $358k in his retirement accounts, while his wife has $225k in her retirement accounts. The three 529 accounts he has for his children have a combined balance of $138.5k. 

While the couple invests about $148k into the market each year, they only invest $2,500 per month in non-retirement assets. The remaining funds go into one of the high-yield savings accounts.

Is this couple being too defensive with their money, or are they taking the right course of action? I’ll share my thoughts, but it is always good to speak with a financial advisor if you can.

The Savings Accounts Have Too Much Money

$767k is a lot to put in high-yield savings accounts. That’s more than enough for an emergency, and this couple also lives in the suburban midwest, where the cost of living is lower than average. 

Assuming a 4.0% APY, a $767k balance provides $30,680 per year. However, interest income is treated as ordinary income, and that means a higher tax rate. This couple earns a lot of money, so they’ll have to pay at the 24% tax rate. They have to pay $7,363.20 in taxes on their interest.

However, you can get a similar yield from a blue-chip dividend stock. Some dividend stocks appreciate while offering dividends. Furthermore, dividend distributions have much lower tax rates than interest income. 

Set Your Children Up with Custodial Roth Accounts

One Redditor in the comments suggested that the couple hire their kids under their company. Then, the couple can open tax-advantaged Roth IRAs in their children’s names. The children can receive a salary up to the standard tax deduction. It counts as expenses for the company, and your children won’t have to pay taxes on any amount below the standard deduction. 

Roth IRAs are the better choice for children in this scenario. There’s no reason to defer taxes for your children if they are getting taxed at 0% right now. Roth IRA withdrawals are tax-free, and your children won’t have to worry about anycapital gains taxes. Allocating your cash toward these accounts can help the couple turn their children into millionaires.

Consider Growth ETFs

Some Redditors suggested that the couple invests some of their funds into growth ETFs. These funds can significantly outperform high-yield savings accounts in the long run. Furthermore, if the couple leaves at least $1 million for each child (their intended goal), the cost basis of the ETFs gets stepped up. In other words, the children wouldn’t have to pay anycapital gains taxes on any of the gains that the ETF accumulates during their parents’ lifetimes. 

While individual stocks are also an option, growth ETFs are more simple. They give investors the opportunity to get their toe in the water without having to stay on top of the stock market. Fund managers do the research and portfolio allocation for you, and some ETFs make it simple by tracking benchmarks like the S&P 500.