We just completed our monthly finances review and found that our 2022 Net Worth decreased by almost $12,000. Funds we have in our brokerage and retirement accounts took a downfall. Some things are just beyond our control.
The markets being as fickle as it is, we still believe that investing is a slow and steady way to accumulate wealth for financial independence. The same way as exercise repetitions is done one after the other to build the foundation for a healthy patient.
This article will show the tax-advantaged accounts we use and their benefits.
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401k
This provides tax advantages and sometimes a company match to encourage you to save for retirement. When you sign up, a percentage of your before-tax salary is deducted, then paid directly to your investment choice.
How will you benefit?
- Gives you a tax advantage on your investments until you withdraw them in retirement.
- Earns you free money with employer match.
- Lowers your income taxes.
- Harness the power of compounding interest.
- Hides your money from your sticky fingers until you’re retired.
How much did I contribute?
The contribution limit for 2022 is $20,500, and for 50 years or older, up to $26,000. In 2023 limit is $22,500 and still $30,000 for 50 years and up.
2021 was the first year that I maxed out my 401k. Since we had been getting hefty tax bills for the past couple of years, the goal was to lower our tax liability by reducing our gross income. We’ll find out if it worked this April. (Fingers crossed!)
Tip: At least contribute to your company match.
Roth IRA
The most significant advantage of contributing to a Roth IRA is tax-free growth. You pay the taxes upfront by contributing after-tax money, your money grows tax-free, and you also withdraw the money in retirement tax-free.
How will you benefit?
- Gives you access to tax-free retirement funds.
- Earns you tax-free growth on your investments.
- Withdraw (contributions only) penalty and tax-free for emergency expenses.
- Contribute even if you have a 401k.
- Flexible contributions within the limit.
How much did I contribute?
The contribution limit for 2023 is $6,500 a year, with $7,500 catch-up contributions for ages 50 and older.
You can only contribute if you satisfy the income limits. In 2023, the income limit for single filers is $138,000, and for married couples filing jointly is $218,000.
After contributing to the company match on my 401k, I had maxed out my Roth IRA contributions for the last 4 years. I figured that a mix of after-tax and before-tax shelters would secure us from future tax rate changes and income. If we retire early, we can use the account for the Roth IRA conversion ladder.
Tip: Make automatic contributions of $120 a week. It will be maxed out before the year ends. Here are our Top 7 Ideas on How to Save Money.
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Health Savings Account
This personal savings account provides tax advantages and can be used to pay for current or future eligible medical expenses.
How will you benefit?
- Your contributions are not subject to income tax.
- If you put in after-tax money, it is tax deductible.
- Earns you tax-free growth on your investments.
- Lowers your income tax burden
- Withdrawal for qualified medical expenses is tax-free
- Your unspent funds roll over every year.
- It would follow you around if you changed jobs
- Others can contribute to your HSA
How much did I contribute?
Only individuals and families in a High Deductible Health Plan are eligible for HSA. In 2022 the contribution limit was $3,650 for individuals and $7,300 for family coverage. In 2023 the contribution limit is $3,850 for individuals and $7,750 for family coverage.
2021 was the first year I contributed to an HSA. I routinely contribute $300 of after-tax money to the account every month, maxing it out. I plan to deduct my after-tax contributions from my income this tax season.
Tip: Assess your medical needs. It may make more sense to be in a High Deductible Plan to contribute to an HSA.
Perfect Investing?
We are fearful when the market behaves as it is now, but hours of research and past mistakes still make us invest like we do. It is not perfect, but we refuse to let perfect be the enemy of good. Small steps, in at times zigzag roads, leading to the right direction will get us there eventually.
Where do you hope to find yourself in retirement? Contributing to these tax-advantaged accounts may help get you there. Don’t know where to start? Find your sweet spot and evaluate your lifestyle choices and risk tolerance; they usually point you in the right direction.
About Us
We are a Pinoy Physical Therapist duo living somewhat unconventional but intentional lives. Trying to be smarter and better than before, we surround ourselves with content, experiences, and people that help us discover practical yet powerful ways to achieve our goals.
We aim to be financially independent by making small changes to our lives. We invite you to join our journey! We hope that you learn something valuable from our experiences.
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DISCLAIMER
We are NOT certified financial advisors, analysts, or CPAs. Investing strategies shared in this article and the website are not financial advice but our opinions for educational purposes only. We want you to treat our content as a preview to do your research so you can make smart financial decisions.
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