‍

Financial Accounts Everyone Needs to Save on Taxes

‍

In today's financial landscape, understanding how to save on taxes while building wealth is crucial. The government offers several tax-advantaged accounts designed to help people save for retirement, healthcare, education, and even charitable giving. By leveraging these accounts strategically, you can minimize your tax burden and secure a more financially sound future.

‍

In this blog, we’ll explore the essential financial accounts that everyone should consider using to save on taxes, along with tips on how to maximize their benefits.

‍

1. Roth IRA: Grow Your Wealth Tax-Free

‍

One of the most popular tax-advantaged accounts is the Roth IRA. Contributions to a Roth IRA are made with after-tax dollars, meaning you don’t get a tax deduction upfront. However, the real power of the Roth IRA lies in its long-term benefits.

‍

‍

Why a Roth IRA is a Must-Have:

‍

• Tax-Free Growth: Once your contributions are in the account, they grow tax-free. You won't owe taxes on any capital gains, interest, or dividends.

• Tax-Free Withdrawals: When you retire, qualified withdrawals are entirely tax-free. This can be a huge advantage, especially if you expect to be in a higher tax bracket later in life.

• Flexibility: You can withdraw your contributions (not earnings) at any time without penalty, providing you with flexibility in case of emergencies.

• No RMDs: Unlike traditional retirement accounts, Roth IRAs do not require required minimum distributions (RMDs), so your money can keep growing tax-free for as long as you like.

‍

‍Maximizing Your Roth IRA:

‍

• Contribute Early: The earlier you start, the more time your money has to grow tax-free. Max out your contributions each year to take full advantage of compounding interest.

• Backdoor Roth IRA: If your income exceeds the Roth IRA contribution limits, you can still contribute through a backdoor Roth strategy, where you contribute to a traditional IRA and then convert it to a Roth.

‍

‍

Example:

John contributes $7,000 to his Roth IRA in 2024. The investments in his account grow, and when he retires at 65, he can withdraw all the earnings tax-free, making his retirement income even more secure.

‍

💡 Tip:

Start a Roth IRA as early as possible. The younger you are, the more time your investments have to grow tax-free, maximizing the benefit of compounding returns.

‍

‍

2. Traditional IRA: Lower Your Taxable Income Now

‍

While the Roth IRA offers future tax benefits, the Traditional IRA provides immediate tax relief. Contributions to a traditional IRA are often tax-deductible, which can lower your taxable income in the year you make the contribution.

‍

Why Consider a Traditional IRA:

‍

• Immediate Tax Savings: Contributions can reduce your taxable income, which may lower your tax bill in the current year.

• Tax-Deferred Growth: Investments in a traditional IRA grow tax-deferred, meaning you won’t pay taxes on any gains, interest, or dividends until you withdraw the money in retirement.

• Flexibility: A variety of investment options are available within a traditional IRA, including stocks, bonds, mutual funds, and ETFs.

‍

Maximizing Your Traditional IRA:

‍

• Strategize Withdrawals: Because withdrawals are taxed as ordinary income, it’s important to time your withdrawals strategically to minimize taxes. Retiring in a lower tax bracket will make withdrawals more tax-efficient.

• Consider Rollover IRAs: If you have a 401(k) from a previous employer, consider rolling it over into a traditional IRA for potentially better investment options and to consolidate your retirement savings.

‍

‍

3. 401(k) or 403(b): Employer-Sponsored Retirement Plans

‍

For most working Americans, the 401(k) (or 403(b) for nonprofit employees) is the primary retirement savings vehicle. These accounts allow you to contribute pre-tax dollars, which can significantly lower your taxable income in the current year. Many employers also offer matching contributions, which is essentially free money to boost your retirement savings.

‍

‍

Why a 401(k) or 403(b) is Essential:

‍

• Pre-Tax Contributions: Contributions reduce your taxable income, which can lower your tax bracket and overall tax bill.

• Employer Match: Many employers match contributions up to a certain percentage. This match is essentially free money for your retirement.

• Tax-Deferred Growth: Like traditional IRAs, investments in a 401(k) grow tax-deferred, allowing your investments to compound without being taxed until you withdraw funds in retirement.

‍

Maximizing Your 401(k)/403(b):

‍

• Contribute Enough to Get the Full Match: Always contribute at least enough to get the full employer match—this is free money you don’t want to leave on the table.

• Max Out Contributions: For 2024, the maximum contribution limit is $23,000 for individuals under 50, and $30,500 for those 50 and older (including catch-up contributions).

• Use Roth 401(k) if Available: Some employers offer Roth 401(k) options, which combine the tax benefits of a Roth IRA with higher contribution limits.

‍

Example:

Sarah earns $80,000 a year and contributes $20,500 to her 401(k) in 2024. Her taxable income for the year is reduced to $59,500, saving her hundreds of dollars in taxes while her retirement fund grows tax-deferred.

‍

💡 Tip:

Max out your employer’s 401(k) match. If your employer matches 5%, make sure to contribute at least that amount to avoid missing out on free money.

‍

‍

4. Health Savings Account (HSA): Triple Tax Benefits

‍

The Health Savings Account (HSA) is one of the most powerful tax-advantaged accounts available. It provides a triple tax advantage: contributions are tax-deductible, growth is tax-free, and withdrawals are tax-free if used for qualified medical expenses.

‍

Why an HSA is a Hidden Gem:

‍

• Tax-Deductible Contributions: Contributions reduce your taxable income in the year they are made.

• Tax-Free Growth: Just like an IRA, the money in your HSA grows tax-free.

• Tax-Free Withdrawals: As long as you use the money for qualified medical expenses, you will never pay taxes on it.

• No Use-It-Or-Lose-It: Unlike Flexible Spending Accounts (FSAs), HSA balances roll over from year to year.

‍

Maximizing Your HSA:

‍

• Save for Retirement Healthcare: Don’t spend your HSA contributions right away. Let them grow over time to cover healthcare costs in retirement, where medical expenses are often higher.

• Invest Your HSA: Many HSA providers offer investment options, allowing you to grow your HSA balance even faster.

• Use for Medicare Premiums: After age 65, you can use HSA funds to pay for Medicare premiums without penalties.

‍

Related: Who Qualifies for a HSA Deduction?

‍

Example:

Mary contributes $3,850 to her HSA. She invests the balance, allowing it to grow tax-free. When she needs to pay for healthcare expenses in retirement, she can withdraw funds without paying any taxes.

‍

💡 Tip:

Use your HSA for long-term savings by paying for current medical expenses out of pocket, allowing the HSA balance to grow and be used for healthcare expenses in retirement.

‍

‍

5. Flexible Spending Account (FSA): Save on Healthcare and Childcare

‍

A Flexible Spending Account (FSA) is another great tool for saving on taxes, although it comes with a few restrictions. FSAs allow you to set aside pre-tax dollars to cover eligible healthcare and dependent care expenses.

‍

Why FSAs are Useful:

‍

• Pre-Tax Contributions: Contributions reduce your taxable income.

• Use for Medical or Dependent Care Expenses: FSAs can be used to pay for healthcare costs not covered by insurance, such as deductibles, copays, and prescriptions. There is also a dependent care FSA option, which can be used for childcare expenses.

‍

Maximizing Your FSA:

‍

• Estimate Your Expenses: FSAs are use-it-or-lose-it accounts, so be sure to accurately estimate your annual medical or childcare expenses to avoid forfeiting unused funds.

• Take Advantage of Employer Contributions: Some employers contribute to FSAs, so check with your HR department to see if this is available to you.

‍

Example:

Mark enrolls in his employer’s FSA and contributes $3,200 (the maximum for 2024). Throughout the year, he uses this money to pay for doctor visits, prescription medications, and dental work—all without paying taxes on those funds. This lowers his taxable income by $3,200, resulting in significant tax savings.

‍

💡 Tip:

Be mindful of the "use it or lose it" rule. Most FSAs require you to spend the money by the end of the year or forfeit any remaining balance. Some employers may offer a grace period or allow you to roll over up to $610 of unused funds into the next year, so check your plan’s specifics to avoid losing money.

‍

‍

6. 529 College Savings Plan: Save for Education, Tax-Free

‍

If you’re saving for education expenses, the 529 College Savings Plan is a must-have. This account allows your contributions to grow tax-free, and withdrawals used for qualified education expenses (like tuition, books, and room and board) are also tax-free.

‍

‍

Why 529 Plans are a Smart Move:

‍

• Tax-Free Growth: Just like a Roth IRA, your contributions grow tax-free.

• Tax-Free Withdrawals: As long as withdrawals are used for qualified education expenses, they are tax-free.

• No Income Limits: Unlike some retirement accounts, there are no income limits to contribute to a 529 plan.

‍

Maximizing Your 529 Plan:

‍

• Start Early: The earlier you start, the more time your contributions have to grow tax-free.

• Use for Any Education Level: While 529 plans are traditionally used for college, they can now be used for K-12 education as well as certain apprenticeship programs.

• State Tax Benefits: Many states offer tax deductions or credits for contributions to 529 plans, providing additional savings on your state taxes.

‍

Example:

Tom and Alice open a 529 plan for their son, contributing $5,000 a year. By the time he’s ready for college, the account has grown significantly, and they can use it to cover his tuition tax-free.

‍

💡 Tip:

Start early and automate contributions to a 529 plan. Even small amounts can grow over time, reducing the burden of future education costs.

‍

‍

7. Donor-Advised Fund: Maximize Charitable Contributions

‍

For those who regularly donate to charity, a Donor-Advised Fund (DAF) is an excellent way to maximize your tax benefits. A DAF allows you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund to charities over time.

‍

Why Donor-Advised Funds are Beneficial:

‍

• Immediate Tax Deduction: You receive a tax deduction in the year you contribute, even if the funds are not granted to charities until later.

• Flexibility: You can contribute appreciated assets like stocks or real estate, avoiding capital gains taxes and giving more to charity.

• Control: You can control when and how much is distributed to charities, allowing you to be strategic with your charitable giving.

‍

Maximizing Your Donor-Advised Fund:

‍

• Bundle Contributions: If you don’t itemize deductions every year, consider "bundling" several years' worth of charitable contributions into one year to maximize your tax savings.

• Donate Appreciated Assets: Contributing appreciated securities rather than cash can increase your tax savings by avoiding capital gains taxes.

‍

Example:

Rebecca donates $10,000 to a DAF in one year. She gets the tax deduction immediately but can choose which charities to support over the next several years, making it a flexible tool for philanthropy.

‍

💡 Tip:

Bunch several years’ worth of charitable contributions into one year to maximize your tax savings, especially if you’re close to the standard deduction limit.

‍

‍

8. Taxable Investment Accounts: For Flexibility and Growth

‍

While taxable brokerage accounts don’t offer the same tax advantages as retirement or education savings accounts, they do provide flexibility in terms of accessing your funds and potential tax benefits through long-term capital gains rates.

‍

‍

Why Consider a Taxable Account:

‍

• No Contribution Limits: Unlike tax-advantaged accounts, there are no limits to how much you can invest in a taxable account.

• Lower Tax Rates on Long-Term Gains: Investments held for more than a year benefit from long-term capital gains tax rates, which are lower than ordinary income tax rates.

• Tax-Loss Harvesting: You can offset capital gains with capital losses, which can reduce your taxable income.

‍

Maximizing Your Taxable Account:

‍

• Invest for the Long Term: Holding investments for more than a year allows you to take advantage of lower long-term capital gains tax rates.

• Tax-Loss Harvesting: If you have losing investments, sell them to offset gains and potentially reduce your tax liability.

‍

Example:

Emily invests $50,000 in a taxable account. After holding her investments for more than a year, she sells and pays a 15% long-term capital gains tax on her profits instead of the higher ordinary income tax rate.

‍

💡 Tip:

Utilize tax-loss harvesting to offset any capital gains with losses, reducing your overall tax liability on investments.

‍

‍

9. Real Estate Investments: Tax Advantages for Homeowners and Investors

‍

Real estate investments, whether through homeownership or rental properties, offer several tax advantages that can reduce your taxable income.

‍

‍

Why Real Estate is a Powerful Tool:

‍

• Mortgage Interest Deduction: Homeowners can deduct mortgage interest on their primary residence, which can significantly reduce taxable income.

• Depreciation: Real estate investors can depreciate the value of their property, reducing taxable rental income.

• Capital Gains Exclusion: When selling your primary residence, you may exclude up to $250,000 ($500,000 for married couples) of capital gains from taxes.

‍

Maximizing Your Real Estate Investments:

‍

• Depreciation: For rental properties, be sure to take full advantage of depreciation to reduce your taxable income.

• 1031 Exchange: Consider a 1031 exchange to defer taxes on capital gains when selling one investment property and purchasing another.

‍

Example:

David rents out a property and earns $20,000 in rental income. Thanks to depreciation and deductible expenses, he only has to pay taxes on $10,000 of that income, reducing his tax bill.

‍

💡 Tip:

Consider a 1031 exchange to defer taxes on capital gains when selling one investment property and purchasing another, allowing you to reinvest without paying capital gains tax immediately.

‍

‍

10. Business Accounts for the Self-Employed: Save on Taxes and Boost Retirement Savings

‍

If you’re self-employed or own a business, there are additional tax-advantaged accounts and strategies available to help you reduce your taxable income and save for retirement.

‍

Why Business Accounts are a Must:

‍

• SEP IRA and Solo 401(k): These accounts allow business owners to contribute significantly more to their retirement accounts than individual retirement accounts.

• Deduct Business Expenses: You can deduct a wide range of business expenses, including office supplies, travel, and even a portion of your home office if you work from home.

‍

Maximizing Your Business Accounts:

‍

• Max Out Retirement Contributions: If you’re self-employed, maximize contributions to your SEP IRA or Solo 401(k) to reduce your taxable income and save for retirement.

• Deduct Everything You’re Entitled To: Be sure to keep track of all business expenses and take advantage of every tax deduction you’re entitled to.

‍

Related: Tax Strategies the Wealthy Use to Reduce Taxes

‍

Example:

Lisa owns a small business and contributes $30,000 to her Solo 401(k). She also deducts $5,000 in business expenses for her office, reducing her taxable income significantly.

‍

💡 Tip:

Maximize retirement contributions and track all business-related expenses, from office supplies to travel, to ensure you take every deduction available to you as a business owner.

‍

Conclusion

‍

By utilizing these tax-advantaged financial accounts, you can save money, grow your wealth, and prepare for the future while minimizing your tax burden. Whether you’re saving for retirement, healthcare, education, or charitable giving, there’s a financial account designed to help you reach your goals.

‍

Take full advantage of these accounts by contributing early, investing wisely, and staying informed about changing tax laws and contribution limits. With the right strategy, you can build a strong financial foundation and keep more of your hard-earned money.

‍

If you find yourself overwhelmed, consider consulting a tax professional who can guide you through the process and ensure that you’re meeting all your tax obligations without overpaying.

‍

Remember, the key to staying on top of your taxes is being proactive. By making estimated tax payments on time and keeping track of your financial situation, you can avoid penalties and make tax season a much smoother experience. Happy filing!

‍

I hope this information was helpful! If you have any questions, feel free to reach out to us here. I’d be happy to chat with you. 

‍

Vincere Tax can help you with the tax implications of business taxes, stocks, bonds, ETFs, cryptocurrency, rental property income, and other investments. 

‍

Being audited is comparable to being struck by lightning. You don't want to practice pole vaulting in a thunderstorm just because it's unlikely. Making sure your books are accurate and your taxes are filed on time is one of the best ways to keep your head down during tax season. Check out Vincere's take on tax season!

‍

‍

Friends don’t let friends do their own taxes. Share this article! 

‍This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.