When you earn money, whether it’s from a job, a savings account, or investments, you have to pay the IRS a portion of your income. That’s pretty much unavoidable.
But that doesn’t mean you’re doomed to an exorbitant tax bill. One strategy that could leave you paying less money in taxes is to contribute to accounts that allow you to legally shield income from the IRS. Here are three you can use to your advantage this year.
1. 401(k) plans
If your employer offers a 401(k), you have a prime opportunity to not only build up a nice-sized retirement nest egg, but also keep the IRS away from a large chunk of your 2024 earnings. This year, 401(k) contributions max out at $23,000 for savers under age 50 and $30,500 for those 50 and over.
It’s common for employers to offer some sort of 401(k) match to employees. But any matching dollars you receive from your company won’t count toward the aforementioned contribution limits. So if you’re 40 years old and get a $5,000 employer match in your 401(k) this year, you can still put in $23,000 from your own earnings.
2. IRAs
Like 401(k)s, IRAs are designed to help people save for retirement. But the annual contribution limits for IRAs are much lower than 401(k)s — $7,000 if you’re under 50, and $8,000 if you’re 50 or older. With a traditional IRA, your contributions reduce your taxable income (as long as you’re below the income thresholds set by the IRS).
You should also know that while there are plenty of benefits to saving for retirement in a Roth IRA, contributions to one of these accounts won’t shield your income from taxes. You will, however, get to enjoy tax-free withdrawals later in life, whereas with a traditional IRA, those withdrawals will be taxable.
3. HSAs
If you’re enrolled in a high-deductible health insurance plan — defined as having a deductible of $1,600 or more for self-only coverage or $3,200 or more for family coverage — you may be eligible to fund an HSA, or health savings account, this year. To participate in an HSA in 2024, your health plan also needs to have an out-of-pocket maximum of $8,050 for self-only coverage or $16,100 for individual coverage.
From there, your HSA contribution limit will depend on your plan type and age. For self-only coverage, the limit is $4,150 if you’re under 55, or $5,150 if you’re 55 and older. For family coverage, the limit is $8,300 if you’re under 55, or $9,300 if you’re 55 and older.
Keep the IRS away
Since contributions to traditional IRAs, 401(k)s, and HSAs are all made on a pre-tax basis, participating in these accounts allows you to lower your tax burden substantially. For example, if you put $12,000 into a 401(k) this year plus another $3,000 into an HSA, the IRS won’t tax you on $15,000 worth of income.
Plus, having money in any of these accounts could be very beneficial. Retiring with a nice IRA or 401(k) balance could help ensure you’re able to live comfortably as a senior. And having a nice HSA balance could make your next large medical bill a lot less stressful to cover.
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