Strategies to help you save more and pay less in taxes

Make the most of every dollar with these 4 strategies.

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Saving money each month is a great habit when it comes to financial security, but you should also consider a few other ways to build savings, pay less in taxes, and ultimately keep more of your hard-earned cash.

The 2017 Tax Cuts and Jobs Act (TCJA) may have changed a few things, but it didn't change rules granting tax advantages of 401(k)s, 403(b)s, IRAs, HSAs, and other retirement savings accounts. It did, however, expand what's possible with a 529 account.

With this in mind, here are 4 suggestions for enhancing your savings, reducing your taxes, and keeping yourself in solid financial shape.

1. Get tax savings from your retirement accounts

Your tax-advantaged retirement savings accounts can help you save money on your taxes, this year and into the future.

Workplace savings plan

If you have a retirement savings account through your employer, such as a 401(k) or 403(b), you can use it to pay less in taxes. Because the amount you contribute from your paycheck is not subject to tax withholding, it is considered "pre-tax" money; while your retirement savings are "tax-deferred" in that you don't pay income tax on them until they're withdrawn.

Although on the surface it may appear as though you're not actually saving money on taxes—rather, just delaying them—even though you can't claim your retirement savings contributions on your tax return, those pre-tax contributions do lower your taxable income. That means you will ultimately pay less in taxes, and perhaps even fall into a lower tax bracket.

Fidelity suggests you save at least 15% of your pre-tax income, including contributions from your employer, as a best practice for retirement savings.1 If your employer offers a "matching contribution"—meaning they make additional contributions into your retirement account, up to a certain percentage of your pre-tax income—it's important that you contribute the amount necessary to get your full employer match amount. That way, you're not missing out on any of this "free money"!

Another way to save even more is to increase your workplace savings plan contribution to the IRS's maximum allowed contribution of $19,000 in 2019.2

Traditional IRA

An individual retirement account (IRA) is a tax-advantaged way for you to save money for retirement. Traditional IRAs typically allow you to deduct your contributions from your taxes, thereby lowering your taxable income. And any investment growth your IRA money earns is tax-deferred until you withdraw that money in retirement.3

It's important to remember you have until April 15, 2019, to contribute up to $5,500 to your Traditional IRA for the 2018 tax year.4 That IRA contribution limit will increase to $6,000 for 2019.

2. Use a Roth IRA to save on taxes in the future

Although you can use your workplace savings plan and Traditional IRA contributions to get tax advantages in the near term, you will still have to pay taxes on that money when you withdraw it in retirement.

With this in mind, we suggest balancing your savings with other accounts that have different tax advantages, such as a Roth IRA. With a Roth IRA, you pay taxes on your contributions now in exchange for withdrawing that money tax-free in the future.5

For 2019, the IRS's contribution limit for both Traditional and Roth IRAs $6,000 total—up from $5,500 for 2018. You will qualify for Roth IRA contributions in 2019 as long as your modified adjusted gross income is less than $137,000 for single tax filers, or $203,000 for joint filers. As with Traditional IRAs, you may continue contributing to your Roth IRA for the 2018 tax year until April 15, 2019.4

By balancing your savings between accounts that are tax-advantaged now, such as a workplace savings plan and a Traditional IRA, along with an account that's tax-advantaged later, such as a Roth IRA, you'll be able to maximize your tax savings. If you expect to have a lower tax rate this year than you will in retirement, it may make sense to shift more of your savings toward your Roth IRA to take advantage of your current lower tax rate. On the other hand, if you think you'll have a lower tax rate in retirement than you do now, consider shifting your savings toward your workplace savings plan and/or your Traditional IRA to pay less taxes on that money in retirement.

3. Save money for health care costs the tax-smart way

Health savings accounts (HSAs) are individual savings accounts that pair with HSA-eligible high-deductible health insurance plans (HDHPs). With an HSA, you can save money for qualified medical expenses not covered by your health plan. In general, you'll never pay federal income taxes on HSA money you use to pay for a qualified medical expenses.6 Plus, although state taxation rules vary, many states defer to the federal tax law.

HSAs offer triple tax advantages:

  1. Money you contribute pre-tax from your paycheck goes into your HSA tax-free, and also lowers your taxable income.
  2. You can use your HSA money to pay for qualified medical expenses without paying federal income taxes on it.
  3. Unused HSA money rolls over every year, and can be invested for potential long-term growth federal income tax-free.

If you're young and healthy, you can get the most from your HSA by treating it as a retirement account for health care costs. Fidelity estimates that the average couple retiring in 2018 will spend $280,000 on health care costs during retirement.7 A great way to prepare for these costs is to contribute as much as you can to your HSA each year, and invest that money wisely. That way, your retirement health care savings could grow over time. Keep in mind that investing involves risk, including the risk of loss.

4. Save money for a loved one's education costs

The TCJA may not have affected the tax-advantaged retirement savings accounts we've talked about so far, but it did make 529 savings plans more useful and flexible than ever. You can now use up to $10,000 of your 529 savings to cover qualified education expenses for grades K–12—in addition to college and postgraduate education expenses.

That means it could be a good idea to open a 529 savings plan and contribute to it regularly if you want to pay for your child's education or if you're thinking of going back to school sometime in the future.

Contributions to a 529 plan are after-tax, while investment earnings are federal income tax-deferred. Plus, if you withdraw your 529 savings to pay for qualified education expenses—such as books, meal plans, housing, or tuition—you will not have to pay federal income taxes on those withdrawals.

Even better, although you can't write off your 529 contributions on your federal income tax return, many states allow you to deduct some or all of those contributions on your state income tax return. In this way, a 529 plan can help you save money on taxes both now and in the future.

Get more tax-savvy, and get help along the way

If you are doing these four things, you are on-track with solid savings habits that use tax advantages to help you pay less in taxes and save more for the future. For even more assistance, consult a tax professional to evaluate your unique situation and help you enhance your tax savings.

Visit the Tax Reform section of the IRS website for more information about the 2017 tax reform legislation, and to see how it could impact your 2018 filing.

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This information is intended to be educational and is not tailored to the investment needs of any specific investor.
1. Fidelity's suggested total pretax savings goal of 15% of annual income (including employer contributions) is based on our research, which indicates that most people would need to contribute this amount from an assumed starting age of 25 through an assumed retirement age of 67 to potentially support a replacement annual income rate equal to 45% of preretirement annual income (assuming no pension income) through age 93. The income replacement target is based on the Consumer Expenditure Survey 2011 (BLS), Statistics of Income 2011 Tax Stats, IRS 2014 tax brackets; and Social Security Benefit Calculators. The 45% income replacement target (excluding Social Security and assuming no pension income) from retirement savings was found to be fairly consistent across a salary range of $50,000-$300,000; therefore the savings rate suggestions may have limited applicability if your income is outside that range. Individuals may need to save more or less than 15% depending on retirement age, desired retirement lifestyle, assets saved to date, and other factors. Fidelity developed the savings rate targets through multiple market simulations based on historical market data. These simulations take into account the volatility that a variety of asset allocations might experience under different market conditions. Given the above assumptions for retirement age, planning age, wage growth, and income replacement targets, the results were successful in 9 out of 10 hypothetical market conditions where the average equity allocation over the investment horizon was more than 50% for the hypothetical portfolio. Remember, past performance is no guarantee of future results. Performance returns for actual investments will generally be reduced by fees or expenses not reflected in these hypothetical calculations. Returns will also generally be reduced by taxes.
2. Keep in mind that your plan's limit may be lower, and highly compensated employees may not be eligible to contribute up to a plan's maximum.
3. For a Traditional IRA, full deductibility of a contribution for 2018 is available to active participants whose 2018 Modified Adjusted Gross Income (MAGI) is $101,000 or less (joint) and $63,000 or less (single); partial deductibility for MAGI up to $121,000 (joint) and $73,000 (single). In addition, full deductibility of a contribution is available for working or nonworking spouses who are not covered by an employer-sponsored plan whose MAGI is less than $188,000 for 2018; partial deductibility for MAGI up to $199,000. For 2019, full deductibility of a contribution is available to active participants whose 2019 Modified Adjusted Gross Income (MAGI) is $103,000 or less (joint) and $64,000 or less (single); partial deductibility for MAGI up to $123,000 (joint) and $74,000 (single). In addition, full deductibility of a contribution is available for working or nonworking spouses who are not covered by an employer-sponsored plan whose MAGI is less than $193,000 for 2019 partial deductibility for MAGI up to $203,000.
4. MA and ME residents have until Wednesday, April 17, 2019, to make prior year 2018 IRA contributions.
5. A distribution from a Roth IRA is tax free and penalty free, provided the 5-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, qualified first-time home purchase, or death.
6. With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation.
7. Estimate based on a hypothetical couple retiring in 2018, 65 years old, with life expectancies that align with Society of Actuaries' RP-2014 Healthy Annuitant rates with Mortality Improvements Scale MP-2016. Actual expenses may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government's insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

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