Financial Independence

3 Tax Advantaged Accounts You Must Start This Year

We just completed our monthly finances review and found that our 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 done one after the other builds the foundation for a healthy patient.

In this article you will see the tax-advantaged accounts we use and their benefits.

“May the Tax-Free Growth be with you!”
Photo by Lisa Fotios on Pexels.com

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 choice of investment.

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 2021 is $19,500 and for 50 years or older up to $26,000. In 2022 limit is $20,500 and still $26,000 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 lowering our gross income. We’ll find out if it worked this April. (Fingers crossed!)

Tip: At least contribute up to your company match.

Roth IRA

The largest advantage of contributing to a Roth IRA is tax-free growth. You pay the taxes up front 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 in 2021 and 2022 is $6,000 a year with $7,000 catch up contributions for age 50 and older.

You can only contribute if you satisfy the income limits. In 2022, the income limit for single fillers is $144,000 and for married couples filing jointly is $214,000.

After contributing up to the company match on my 401k, I had been maxing out my Roth IRA contributions for the last 3 years. I figured that a mix of after-tax and before-tax shelters would secure us from change in tax rates and income in the future. 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.

Health Savings Account

This type of personal savings account provide 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 rolls over every year.
  • It follows 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 is eligible for HSA. In 2021 the contribution limit was $3,600 for individuals and $7,200 for family coverage. In 2022 the contribution limit is $3,650 for individuals and $7,300 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 makes 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, evaluate your lifestyle choices and risk tolerance they usually point you in the right direction.

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 own opinions that are for educational purposes only. We want you to treat our content as a preview to do your own research so you can make smart financial decisions.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s