Are you in the habit of saving money each month? If so, you're already ahead of the game when it comes to financial security—but you might still want a few ideas to help you keep more of your hard-earned cash.
Here four strategies to consider that can help you pay less in taxes, make the most of your savings, and build a strong financial foundation.
1. Start with your tax-advantaged retirement accounts
Workplace Savings Plan
Your workplace savings plan is an employee benefit designed to help you save for retirement. You contribute money to the plan before taxes are taken out (so it's "pretax"). These savings are then considered "tax deferred"—meaning you pay no income taxes on the money you put in, or on any investment earnings, until you withdraw it.
So how is this tax-advantaged? While your workplace savings plan is not something you claim on your tax return, the pretax money you put in lowers your taxable income because it comes out of your paycheck before taxes are taken out. This helps reduce your year-end tax bill.
Fidelity suggests saving at least a total of 15% of your pretax income each year as a best practice.1 This 15% includes any matching contributions your employer may offer ("matching contributions" may also be referred to as "the match"—and you should take advantage of this free money).
If you're looking to save even more, consider adjusting how much you contribute to your workplace savings plan, so that you hit the maximum contribution amount of $18,500 in 2018.2
An IRA (individual retirement account) is an account set up at a financial institution that allows you to save for retirement in a tax-advantaged way. If you have a Traditional IRA, you may be able to deduct the money you contribute on your tax return, and any earnings can potentially grow tax deferred until you withdraw them in retirement.3
Keep in mind, if you have a Traditional IRA, you have until April 17, 2018, to contribute up to $5,500 for tax year 2017 (the limit is the same for 2018).
2. Fund a loved one's education
If you want to pay for your child's college education (or if you're considering going back to school at some point), consider opening a 529 college savings plan and funding it regularly.
A 529 plan offers a flexible, tax-advantaged way to save for college. While contributions to a 529 are made with after-tax money, earnings grow federal income tax deferred, and you don't have to pay federal income tax on the withdrawals when used for qualified education expenses like tuition, rent, food, books, and more.
Putting money into a 529 plan may also lower your tax bill today. You can't write off contributions to a 529 against your federal income tax, but many states (including Washington, D.C.) let you deduct some or all of your contributions on your state's income tax return.
3. Save for health care the tax-favored way
You may have heard about Health Savings Accounts (or HSAs) and you may even have one—but in case you don't, here's what this kind of account involves: HSAs are individual accounts offered by employers, paired with an HSA-eligible health insurance plan to help you pay qualified medical expenses (think contact lenses, prescription medicines, chiropractor visits) not covered by your health plan. If you put money in an HSA and use that money to pay for a doctor's visit or another qualified medical expense, you never pay federal taxes on the money.4 Although state taxation may vary, most states follow the federal tax law.
With an HSA, you can save money on taxes in 3 ways (something no other accounts offer):
- The money you save from your paycheck goes into your HSA tax-free and lowers your taxable income.
- You can use those pretax savings to pay for qualified medical expenses and get another tax break.
- What you don't use, you can save from year to year. If you invest any extra savings in your account, you won't be taxed on any growth and/or earnings.
The way to get the most from your HSA, especially if you are younger and time is on your side, is to treat it like a special retirement account for health care costs. Contribute to it on a regular basis throughout your working career, just like you would your workplace savings plan. Because the HSA isn't a "use it or lose it account," if you invest it wisely it can really grow and compound for years—which could bump up your nest egg for the future. Keep in mind that investing involves risk, including the risk of loss.
4. Save on taxes later with a Roth IRA
While your workplace savings plan and tax-deductible Traditional IRA contributions offer tax advantages today, you'll need to pay taxes on that money when you withdraw it in retirement (or whenever the money is distributed or withdrawn). Because of this, it's important to balance your savings accounts with others that are tax-advantaged in a different way, like Roth IRAs.
With Roth IRAs, you pay taxes on the money you contribute to the account up front in return for tax-free withdrawals in the future.5 So when you fund both a workplace savings plan (and/or a Traditional IRA) and a Roth IRA, you can save on taxes owed today and tomorrow.
In 2018, the maximum amount you can contribute to Traditional and Roth IRAs is $5,500 (no change from 2017). The modified adjusted gross income phase-out range to qualify for a Roth IRA in 2017 was $118,000 to $133,000 for singles and $186,000 to $196,000 for married couples. In 2018, the phase-out range is $120,000 to $135,000 for singles and $189,000 to $199,000 for joint tax filers.
Like the Traditional IRA, you have until April 17, 2018, to contribute to a Roth IRA for the 2017 tax year.
Becoming a tax-savvy investor
You're already on track with good savings habits—and now by contributing to tax-advantaged accounts like the ones listed here, you'll have tax-efficient options that can help you meet your financial goals today—and free up more funds to save for your future.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917