December is here, and as we collectively take a deep exhale following our respective Black Friday spending binges, it’s time to get back on the financial ball. There is one month left in 2023, and just enough time to implement some tax-saving, net worth enhancing strategies before year-end. Let’s dive in:
Tax Savings Now:
401k, 403(b), & 457 Plans
If you work full time, chances are your employer offers a retirement plan. Depending on whether your employer is for-profit or not, it may be called a 401k, 403(b), or 457 plan (government only). These types of plans allow you to deposit money directly from your paycheck into an investment account on a pre-tax basis. Money in these accounts will then grow tax-free until retirement, when you would theoretically withdraw the funds. In other words, you get to save money and defer paying taxes until you retire.
The annual contribution limit to these types of plans in 2023 is $22,500, or $30,000 if you’re over 50 years old. If you receive an annual bonus and have no immediate plans for those funds, I highly recommend saving some or all of it into a company retirement plan.
Traditional Individual Retirement Accounts (IRAs)
Traditional IRAs work very much like 401ks, except they are not offered by employers – you’re on your own to create and fund one. You can invest up to $6,500 per year in an IRA ($7,500 if you’re over 50), provided you fall under certain income limits. The tax savings show up when you complete your tax return – there’s a specific line where you deduct how much you put into a traditional IRA from your income.
Those specific income limits to contribute and take a deduction for a Traditional IRA are as follows:
Single: No limit if employer doesn’t offer a retirement plan, otherwise $73,000
Married: No limit if either spouse has a retirement plan at work, $218,000 if one spouse does, $116,000 if both spouses do
You can open a traditional IRA at most online brokerages (Schwab, Vanguard, Fidelity, Robinhood, etc.). And remember, if you pull funds from a 401k or IRA before age 59.5, you might incur taxes and/or penalties.
Business Owners/Contractors – Maximize Write-offs
As a business owner or 1099 contractor, you can deduct any necessary business expenses, including things like vehicles, mileage, technology, and supplies. It’s good practice to go through your spending during the year to see if anything you purchased had a business use and could be deducted. Also, any payments towards health, dental, or vision insurance are deductible, so be sure to have those records ready come tax time.
As far as tactical items to maximize write-offs now, bonus depreciation is 80% for new equipment (including vehicles) in 2023 and Section 179 of the tax code may allow you to write off the entire cost of equipment in one tax year. Other ideas include prepaying items such as business insurance, subscriptions, etc. to realize expenses in 2023, although the benefit of the purchase won’t occur until 2024.
Final sidebar – it often makes sense for self-employed individuals to create a 401k for themselves. Google “solo 401k” to see how this special type of retirement plan can save you thousands in taxes.
Tax Savings Later
Roth IRAs
If you make too much to contribute to a traditional IRA, a Roth IRA is the next best option. You won’t receive a deduction for contributing to one of these accounts, but any future investment gains on Roth funds is tax-free. That is, let’s say you contribute $6,500 to a Roth IRA this year and it grows to $100,000 40 years from now. That entire $93,500 gain is tax free when you withdraw your funds.
While there are also technically income limits for contributing to a Roth IRA, these can be easily bypassed with a strategy called a “backdoor Roth IRA contribution.”
Tax Savings Now & Later
Health Savings Accounts (HSA)s
These are special accounts in that you get a deduction when you contribute to one (like a traditional IRA), but your earnings are also tax free (like a Roth IRA). It’s the best of both worlds. The only catch is that you have to use the funds for medical expenses or you’ll face both penalties and taxes.
You need to have what’s called a “high-deductible health plan” to qualify for an HSA. In 2023, this means a deductible of $1,500 or more for an individual or $3,000 or more for a family. You can contribute up to $3,850 to an HSA if it’s just you under the insurance policy or $7,750 if you have family coverage.
If you get insurance on HealthCare.gov, you may have an HSA eligible plan but need to open one on your own. Personally, I like Fidelity’s HSA platform and relatively low fee structure.
Summed Up
If you have extra cash on-hand, you can save yourself a lot in taxes by using these various advantaged accounts. I avoided going too much into the details and numbers in this article, but if you have a specific question, leave it in the comments and I’ll reply as soon as I can!
| Tax Savings Now | Tax Savings Later | Tax Savings Now & Later |
| Employer retirement plans (401ks, 403(b)s, 457s) | Roth IRAs | Health Savings Accounts (HSAs) |
| Traditional IRAs | ||
| Maximizing self-employed & business deductions (bonus depreciation, solo 401ks, section 179 deductions, pre-paying 2024 expenses) |