Tax-Smart Strategies: Are You Maximizing Your Tax-Advantaged Accounts?

Tax-advantaged accounts might be as close as you can get to a financial sure thing. Every dollar you don’t pay in tax is a dollar you can use to reach your goals. In this part of our series on tax-smart strategies, we will look at some of the accounts you can be maxing out.

Make the most of your 401(k)

For most Americans, we believe that employer-sponsored retirement accounts are the backbone of retirement savings—whether it is a 401(k) plan offered by a for-profit company, a 403(b) plan offered by a nonprofit employer or a 457 plan available from a state or local public employer.¹

These plans allow you to contribute pre-tax money, which can be invested and allowed to grow on a tax-sheltered basis. The 2023 contribution limit for most plans is $22,500, and those aged 50 and older can contribute an extra $7,500 for an all-in total of $30,000.²

If you are seeking to max out your tax-advantaged retirement savings, we believe this is a great place to start—especially if your employer will help by making contributions on your behalf.

Find your way into a Roth IRA

Unlike a 401(k), contributions to a Roth IRA are made with after-tax dollars. However, they allow your investments to grow tax-free and ultimately be withdrawn without any tax consequences.³

If you’ve already maxed out your 401(k), a Roth IRA is a way to get more tax-advantaged savings working for you. Alternatively, if your current taxable income is lower than you expect it will be in your retirement years, you and your wealth advisor might determine that a Roth IRA contribution or using your company’s Roth 401(k) option (if one is available) is actually preferable to a pre-tax 401(k) at this time.⁴

If you do wish to contribute in 2023, the Roth IRA limit is $6,500, with an additional $1,000 permitted if you are age 50 or older.⁵ There are a few ways you might approach your contribution:

• Contribute directly. You may be able to contribute directly to a Roth account if you are under the income limit. Single filers can’t contribute to a Roth IRA if they earn more than $153,000 in 2023. For married couples filing jointly, the limit is $228,000.⁶
  
• Contribute through a “back door.” If your income is too high to contribute directly, you might be able to make a nondeductible contribution to a traditional IRA, then turn around and convert that contribution to a Roth IRA on a tax-neutral basis. This is called the “back door Roth.” There are several caveats to consider with this option, so make sure to consult your wealth advisor first.⁷
• Contribute through your employer. Depending on your tax situation, and if your employer allows it, you may be able to make your 401(k) contributions on a Roth basis rather than a pre-tax basis.  This could be especially powerful since 401(k) plans have a higher contribution limit ($22,500 in 2023, excluding the catch-up) than IRAs do ($6,500 in 2023, excluding the catch-up) which would allow more assets to be saved on a tax-free, Roth basis if that is what your planning situation calls for.⁸

Make a healthy contribution to a Health Savings Account

If you have expenses for things like medical, dental and vision care and prescription drugs that are not reimbursed by your high-deductible health plan, a Health Savings Account (HSA) is a tax-advantaged account that might be able to help you out.⁹

In 2023, you or your employer can contribute up to $3,850 for individual coverage or $7,750 for family coverage.¹⁰ These contributions are invested in your HSA, and no tax is levied on your contributions, your earnings or any distributions that you use to pay for qualified medical expenses.¹¹

Study up on college plans

College plans—often called 529 plans because they come from Section 529 of the federal tax code—can help you pay for a college education using tax-advantaged savings.

Each state has its own plan and rules, so pay attention to whether or not your state allows a tax deduction for the contributions you make. In states where a tax deduction is allowed, these accounts are triple tax-advantaged: you get a deduction for your contributions, the assets in the account grow tax-deferred and the distributions are tax-free as long as they are used for qualified education expenses.¹²

If you are concerned about tying up money in a 529 plan when you are unsure of whether the money will ultimately be used for college or not, take heart. Starting in 2024, up to $35,000 of leftover funds in a 529 account can be rolled over into a Roth IRA as long as it meets a few criteria, including the 529 account being at least 15 years old.¹³

All else being equal, investing in a tax-advantaged account has the potential to leave you with significantly more money in your pocket. Working with your wealth advisor, you can gain a better understanding of which accounts are best for your specific situation, prioritize your use of them and take a helpful shortcut to your financial goals.

¹ https://www.investopedia.com/ask/answers/100314/what-difference-between-401k-plan-and-457-plan.asp
² https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500
³ https://www.investopedia.com/terms/r/rothira.asp
⁴ https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/
⁵ https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500
⁶ https://www.investopedia.com/terms/r/rothira.asp
⁷ https://www.investopedia.com/terms/b/backdoor-roth-ira.asp
⁸ https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500
⁹ https://www.investopedia.com/terms/h/hsa.asp
¹⁰ https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/2023-irs-contribution-limits-for-hsas-and-high-deductibel-health-plans.aspx
¹¹ https://www.investopedia.com/terms/h/hsa.asp
¹² https://www.investopedia.com/terms/1/529plan.asp
¹³ Ibid.

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