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Discover how to maximize tax savings with strategic use of tax-advantaged accounts like 401(k)s, HSAs, 529 plans, and more. Learn expert tips to grow your wealth and reduce taxable income.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Related: Who Qualifies for a HSA Deduction?
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.
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.
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.
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.
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.
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.
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.
Start early and automate contributions to a 529 plan. Even small amounts can grow over time, reducing the burden of future education costs.
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.
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.
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.
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.
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.
Utilize tax-loss harvesting to offset any capital gains with losses, reducing your overall tax liability on investments.
Real estate investments, whether through homeownership or rental properties, offer several tax advantages that can reduce your taxable income.
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.
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.
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.
Related: Tax Strategies the Wealthy Use to Reduce Taxes
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.
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.
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!
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!
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.
For business tax planning articles, our tax resources provides valuable insights into how you can reduce your tax liability now, and in the future.
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