Tax-Advantaged Accounts: The Best Way to Save on Taxes

What Are Tax-Advantaged Accounts?

Tax-advantaged accounts offer special tax treatment to encourage saving for retirement, healthcare, and education. The tax benefits can save you thousands of dollars annually.

Types of Tax Advantages

Tax-Deferred (Traditional Accounts)

• Contributions reduce taxable income NOW
• Money grows tax-free
• Pay taxes when you withdraw in retirement
• Best if you expect lower tax rates in retirement

Tax-Free (Roth Accounts)

• Contributions made with after-tax money
• Money grows tax-free
• Qualified withdrawals are completely tax-free
• Best if you expect higher tax rates in retirement

Triple Tax-Advantaged (HSA)

• Tax-deductible contributions
• Tax-free growth
• Tax-free withdrawals for qualified expenses
• The best tax deal available

Retirement Accounts

401(k) / 403(b) / 457

2025 Contribution Limits:

• Employee: $23,500
• Catch-up (50+): Additional $7,500
• Total (employer + employee): $70,000

Key Benefits:

• Pre-tax contributions reduce taxable income
• Many employers match contributions (free money!)
• Roth 401(k) option available at many employers

Priority: Always contribute enough to get full employer match first.

Traditional IRA

2025 Contribution Limits: $7,000 ($8,000 if 50+)

Tax Deduction:

• Full deduction if no work retirement plan
• Phases out if covered by work plan AND income exceeds limits
• Single: $77,000-$87,000 (2024)
• Married: $123,000-$143,000 (2024)

Roth IRA

2025 Contribution Limits: $7,000 ($8,000 if 50+)

Income Limits (2024):

• Single: Full contribution under $146,000, partial up to $161,000
• Married: Full contribution under $230,000, partial up to $240,000

Key Benefits:

• Tax-free growth and withdrawals
• No required minimum distributions
• Can withdraw contributions (not earnings) anytime without penalty

SEP IRA (Self-Employed)

2024 Contribution Limits: Up to 25% of net self-employment income, max $69,000

Best for: Self-employed individuals who want to contribute more than IRA limits

Solo 401(k) (Self-Employed)

2024 Limits: Up to $69,000 total (employee + employer contributions)

Best for: Self-employed individuals without employees

Healthcare Accounts

Health Savings Account (HSA)

Requirements: Must have high-deductible health plan (HDHP)

2024 Contribution Limits:

• Individual: $4,150
• Family: $8,300
• Catch-up (55+): Additional $1,000

Triple Tax Advantage:

1. Tax-deductible contributions
2. Tax-free growth
3. Tax-free withdrawals for qualified medical expenses

Pro tip: Invest HSA funds for long-term growth, pay medical expenses out-of-pocket now, save receipts, reimburse yourself tax-free years later.

Flexible Spending Account (FSA)

2024 Limit: $3,200 for healthcare FSA

Key Difference from HSA:

• Use-it-or-lose-it (some rollover options)
• Doesn't require HDHP
• Employer-sponsored only

Education Accounts

529 Plan

Tax Benefits:

• No federal deduction (some states offer deduction)
• Tax-free growth
• Tax-free withdrawals for qualified education expenses

Contribution Limits: Very high (varies by state, often $300,000+)

Best for: Saving for children's or grandchildren's education

Coverdell ESA

Contribution Limit: $2,000/year per beneficiary

Advantages Over 529:

• Can be used for K-12 expenses
• More investment flexibility

Disadvantages:

• Lower limits
• Income restrictions

Account Priority Order

For most people, prioritize in this order:

1. 401(k) up to employer match (free money)
2. HSA (if eligible—triple tax advantage)
3. Roth IRA (if eligible—tax-free growth)
4. 401(k) to max ($23,500)
5. Taxable brokerage (no limits, flexibility)

Adjust based on your situation—high earners may prioritize traditional accounts for current deductions.

Common Mistakes

1. Not Getting the Full 401(k) Match

This is free money. Always contribute enough to get the full match.

2. Using HSA Only for Current Expenses

If you can afford to, invest your HSA and pay medical expenses out-of-pocket. HSA becomes a super-powered retirement account.

3. Ignoring Roth Options

Diversifying between pre-tax and Roth gives you tax flexibility in retirement.

4. Contributing to Non-Deductible Traditional IRA

If you can't deduct it and can do Roth, choose Roth (or consider backdoor Roth).

Key Takeaways

1. Tax-advantaged accounts can save thousands in taxes annually
2. Always get the full employer 401(k) match first
3. HSA is the best tax deal if you're eligible
4. Diversify between pre-tax and Roth for flexibility
5. Prioritize accounts based on your income and goals