Don't Miss Out on Thousands of Dollars in Tax Breaks With These 3 Accounts

If your savings and investments aren't where you want them to be, tax breaks can make a big difference. Particularly when you're saving for healthcare or retirement -- two potentially significant costs that many of us worry about.

The government wants you to put money aside. It incentivizes retirement savings through things like IRAs, 401(k)s, and HSAs. In fact, you could save thousands of dollars by maximizing your contributions in three specific accounts. Here's how.

1. IRAs

Individual retirement accounts (IRAs) are a popular way to save for your golden years. Most top brokerage firms let you use your IRA to buy stocks, bonds, ETFs, and other investments. Be aware that you'll have to pay a penalty if you want to withdraw your funds before you reach age 59 1/2.

Click here to learn more about the best brokerages for IRAs. They offer several types of IRAs, a solid mix of investments, and won't hit you with heavy fees.

Here are some common IRA types:

• Traditional IRA: This is a way to reduce your current tax bill. Your investments then grow, and you won't need to pay taxes until you withdraw that money. Many people will be in a lower tax bracket when they retire, making this an attractive choice.
• Roth IRA: This works in the opposite way from a traditional IRA. You put in money you've already paid taxes on, but can then make tax-free withdrawals once you retire.
• SEP and SIMPLE IRAs: These are aimed at small businesses or people who are freelancers or self-employed. The contribution limits are higher than other IRAs, but they take more work to administer.

Who can open an IRA?

Pretty much anyone with earned income can open an IRA. However, if you or your spouse have a work-based retirement plan, you may not be able to claim the full tax deduction on a traditional IRA.

How much can you contribute?

You can have several IRAs, but there's a limit to the total amount you can contribute each year. For 2024, the maximum you can put in is $7,000. If you're over 50, you can put in an extra $1,000 as a catch-up contribution.

How much could you save right now?

Let's say you make the maximum $7,000 contribution to a traditional IRA and you don't pay into a work-based plan or exceed the income limits. In some cases, this could reduce your taxable income enough to push you into a lower tax bracket.

Otherwise, the table below shows how much you could reduce your tax bill today:

2. 401(k)s

401(k)s are workplace retirement plans that deduct your contributions directly from your paychecks. Some employers will even match a portion of what you contribute.

Similar to IRAs, a traditional 401(k) can reduce your tax bill now, but you'll pay taxes on your withdrawals later on. A Roth 401(k) won't impact your taxable income today, but you can make tax-free withdrawals when you retire.

Who can open a 401(k)?

Anyone with an employer who offers a 401(k) plan can open one. Unfortunately, data from the Economic Innovation Group suggests that over 40% of Americans who work full time don't have access to one. If you work for yourself, it's worth looking into solo 401(k)s.

How much can you contribute?

For 2024, the most you can put into your 401(k) is $23,000. Over-50s can make an extra $7,500 in catch-up contributions. Those limits are higher for the 2025 tax year.

How much could you save?

You'd need to put about $2,000 a month aside to reach the $23,000 threshold. That's a lot for many Americans.

To get a rough idea of your potential savings, multiply the amount you plan to contribute by your marginal tax rate. So, let's say you earn $80,000 a year and have a marginal tax rate of 22%. You put 15% of your income -- $12,000 -- into your 401(k).

• Contribution x marginal tax rate = Approximate savings
• $12,000 x 0.22 = $2,640

3. Health savings accounts (HSAs)

HSAs are tax-advantaged healthcare accounts. It's a type of investment account that can have a triple tax advantage. Your contributions are tax deductible. The returns are tax deferred. Withdrawals are tax free as long as you use them for eligible medical expenses.

Who can open one?

Anyone with an eligible high-deductible health plan can open an HSA, as long as they're not covered by Medicare or another health insurance plan.

How much can you contribute?

For 2024, the maximum an individual can put into an HSA is $4,150. Families can contribute $8,300. If you're over 55, you can put in an additional $1,000.

How much you could save

Let's say you're an individual and you put the full $4,150 into your HSA for this year. The table below gives you an idea of possible savings:

Bottom line

Understanding taxes can feel overwhelming. But it's worth finding out what tax breaks you might qualify for as an extra couple of thousand dollars a year is a lot of money. If you're not sure where to start, talk to a financial advisor.