How Do You Save on Taxes? A Quick Look at Tax-Advantaged Accounts

Updated on January 19, 2023 by

Woman Trying To Save On Taxes

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Every new year brings some vital financial questions to ponder over and decide. For instance, your goal can be boosting your savings, regardless of inflation or other situations. Everyone can have different perspectives about their needs, but you can leverage tax-advantaged accounts to reduce your tax payment.

You can categorize these accounts into two broad segments: tax-exempt and tax-deferred. The first uses your after-tax money, and the latter, pre-tax earnings. Due to this difference, your gains can have a significant impact. You don’t have to worry about paying tax on the yields gained from tax-exempt accounts, while the other will need you to pay the current tax rate.

If this makes you feel tax-exempt accounts are better, don’t rush. After all, market conditions and rates keep changing and affect these options. Let’s look at a few options under them once.

E.A. Buck Accounting & Tax Services is a top rated Honolulu financial advisor and we spoke to them for guidance on this issue. Here’s what they shared.

 

401(k) or 403(b) – tax-deferred accounts

 

Employers offer these accounts: 401(k) by non-profit and private companies and 403(b) by a government and non-profit agency. The programs use a portion of your paycheck. Some companies can add the same amount of money into your account as deducted from your paycheck. The good news is IRS has increased the contribution limit for 2023.

 

Flexible Spending Accounts (FSAs) – tax-deferred accounts

 

You get this from your employer. It uses your pre-tax money and can fund your healthcare expenses, which your insurance may not include. But these plans need you to use them by year-end, or you lose the money. That’s why you must be careful about how much money you add here.

 

Roth IRA – tax-deferred accounts

 

It takes your after-tax income and doesn’t ask for any payment at the withdrawal time. You can benefit from these accounts if you worry your tax amount will be higher at your retirement. Since the tax rates are low this time, it can be an opportunity to take advantage of the situation before new announcements happen. The financial advisors recommend people should file their tax-exempt assets on priority. Only some people can be eligible for these accounts because of their income bracket. Hence, consulting your financial advisor can be a good idea to find a solution.

 

Roth 401(k) – tax-deferred accounts

 

You can increase your retirement savings if your employer offers this account apart from a 401(k). You don’t have to think about income limits. It can be an excellent addition to your traditional retirement account.

 

It’s natural to find these things overwhelming because you already have your plates full of many other tasks. You may need more mental bandwidth to spend on these calculations and comparisons. But savings should grow, and you must make every effort in this direction.

Since it’s difficult for anyone to know about all the options and evaluate their efficacy, it’s best to pass this burden on to a trusted financial advisor. Their updated knowledge and experience keep them in tune with everything happening in the financial world. Hence, it’s easy for them to guide you.

Editor-in-chief and co-authors at ShineSheets.com

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