Tax-Advantaged Savings and Investing Vehicles
Ensuring that you are maximizing tax-advantaged savings tools is at the top of the list regarding tax planning. Putting away money in tax-deferred accounts reduces your income in the year you contribute. Taxes on the original contribution and growth are due when the funds are withdrawn in retirement.
Contributing the maximum amount to a 401(k) of $20,500 in 2022 (plus the catch-up amount of $6,500 for those 50+) may have an additional benefit this year. Asset values are lower, so your contribution will have more purchasing power. Keep contributions steady and spread out, so you can minimize the impact of any further declines.
You’ll need to wait until age 59 ½ to access the funds, or there will be a penalty on withdrawals, in addition to taxes. You want to be sure you set yourself up to have income flexibility in retirement, so when you eventually pay the taxes, you’ll be in a lower tax bracket.
If one spouse is no longer working, don’t neglect retirement savings in a spousal IRA. This is a regular IRA account in the non-working spouse’s name. It circumvents the IRS rule that you must have income to contribute to an IRA. The amount that can be deducted depends on whether the working spouse has a 401k plan. For 2022, an income of $204,000 or less means that the full amount of the spousal IRA contribution is tax-deductible.
A Healthcare Savings Account (HSA) is a tax-advantaged way to put money away in an investment account for health-related spending in retirement. Qualified spending isn’t just on doctor visits or medical needs – it also includes long-term care policy premiums, so starting an account now is a great way to cover these premiums later.
HSAs are triple-tax-advantaged. This means that money you put away reduces income in the year of the contribution – in 2022, that’s $3,650 for self-only and $7,000 for families, plus $1,000 catch up for those over 50. The money grows tax-free, and qualified withdrawals are also tax-free.
The HSA requires a high-deductible health insurance plan, so you’ll need to review your coverage needs and ensure your plan meets the criteria.
Savings in a 529 plan grow tax-free, and qualified withdrawals are also tax-free. Funding them with up to $16,000 annually keeps the amounts under the gift-tax exemption, so no taxes are due. In addition, some states provide tax benefits for contributing to a 529 plan.
Keep in mind – these aren’t just for college anymore. The fund can be used for K-12 education as well. The tax-free growth lets you get ahead on education saving. Like any investment, as you get closer to the date when funds will be needed, you want to adjust your investment mix for lower risk.