It’s easy to avoid thinking about your income taxes until just before the April deadline. In fact, according to the Internal Revenue Service,
Including tax efficiency as part of your financial strategy might be easier than you think. And it's an important topic to understand. The
Consider these three ways to help stay tax efficient before you file in the spring.
1. Save more for retirement by maximizing contributions.
Investing for your future retirement goals can help benefit you at tax time every year. Contributions to the following qualified retirement accounts have distinct tax benefits.
Employer sponsored retirement plans: 401(k)s, 403(b)s & 457(b)s
Your contributions to a
- 2022 contribution limit: $20,500
- 2023 contribution limit: $22,500
As an additional boost to retirement savings,
- 2022 catch-up limit: $6,500
- 2023 catch-up limit: $7,500
Roth versions of 401(k)s & other employer-sponsored retirement plans
Your employer also may offer a Roth version of their retirement plan, like
Where Roth accounts differ from traditional plans, which are funded with pre-tax dollars, the contributions made to Roth accounts already have been taxed so no additional tax liability will be incurred down the road (given you've met withdrawal eligibility requirements)2. A Roth account may be most appropriate if you believe you are not yet in your peak earning years and you may be in a higher tax bracket in retirement.
Individual retirement accounts (IRAs)
IRAs offer a way to invest outside of your employer's plan. While the contribution limits are lower than employer plans, both traditional and Roth IRAs offer tax benefits. You have until the federal tax filing deadline of April 15 to make contributions to traditional and Roth IRAs for the previous year.5
- 2022 contribution limit: $6,000
- 2022 catch-up limit: $1,000
- 2023 contribution limit: $6,500
- 2023 catch-up limit: $1,000
Let's explore the differences between a traditional and Roth IRA.
You typically are able to take a tax deduction for contributions to a
While there is no tax deduction for
The most valuable piece of advice people would have given their younger selves would be to learn about tax implications for their retirement savings.
2. If you’re raising kids, look for child tax credits & college savings plans.
Raising a family is both priceless and expensive. Here are two options that can help you financially.
Child tax credit
It’s a tax credit, which means it reduces your taxes due on a dollar-for-dollar basis. However, there are income thresholds above which the credit begins to phase out. For the 2022 and 2023 tax years, the credit provides of maximum of $2,000 per qualifying dependent child under age 16. To qualify, income thresholds for single taxpayers and heads of household are $200,000 ($400,000 for joint filers).
529 educational savings plan
If you’re planning to help your children with education expenses, a
While you cannot deduct contributions to 529 plans on your federal income taxes, most states with an income tax allow residents to deduct a portion of their contributions or receive a tax credit.
3. Consider the advantages of health savings or flexible spending accounts.
If you have access to a flexible spending account (FSA) or health savings account (HSA), they are both tax-efficient ways to help you manage the rising cost of healthcare.
Both can reduce your taxable income for the year and be used to pay for qualifying medical, dental and other eligible healthcare costs. But be aware of their differences.
Flexible spending account (FSA)
If your employer offers
In 2023, you can contribute up to $3,050 to an FSA.
Health savings account
To qualify for an
In 2023, you can contribute up to $3,850 for yourself, or $7,750 for your family, to an HSA.
Be mindful of the contribution limits and withdrawals for eligible expenses for FSAs and HSAs, or you could face tax penalties or forfeit unused funds.7
Consider options to protect your livelihood
Finally, have you thought about
While you can’t predict the future, you can plan for it. The death benefit from life insurance is generally
Want tax resources at your fingertips? Check out our