Strategies to help you save more and pay less in taxes

Make the most of every dollar with these four strategies.

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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

Traditional IRA
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):

  1. The money you save from your paycheck goes into your HSA tax-free and lowers your taxable income.
  2. You can use those pretax savings to pay for qualified medical expenses and get another tax break.
  3. 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.

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Investing involves risk, including risk of loss.
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 2017 is available to active participants whose 2017 Modified Adjusted Gross Income (MAGI) is $99,000 or less (joint) and $62,000 or less (single); partial deductibility for MAGI up to $119,000 (joint) and $72,000 (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 $186,000 for 2017; partial deductibility for MAGI up to $196,000. For 2018, full deductibility of a contribution 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 $189,000 for 2018 partial deductibility for MAGI up to $199,000.
4. With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation.
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.
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.
The statements and opinions expressed in this article are those of the author. Neither Fidelity Investments nor your employer can guarantee the accuracy or completeness of any statements or data.

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

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