Year End Tax Savings

Have you ever had some money leftover in the bank after the holidays or an end-of-year bonus hit before December 31st, but you’re dreading the tax implications heading into the New Year? Well, let’s explore a couple ways you can save that might help lessen that hit and help you start off 2023 ahead of the game! Remember, always talk to your tax/financial professional before choosing which route to take when searching for tax savings. The enclosed ideas and topics are for educational purposes only and are not recommendations.

There are three main ways you can save at the end of the year, two of which have tax savings implications. You can save into your 401k/IRA, a Roth IRA, or a Health Savings Account (HSA). If you have a company sponsored 401k plan, this is the easiest place to save and allows you to receive a tax deduction for any contributions you make during the calendar year ending December 31st. If you want to go this route, simply increase your contribution amount on a one-off basis to ensure you save a higher amount of your gross paycheck. Then you can always change it back immediately after your paycheck hits. Example: You typically receive a paycheck for $2,000 gross twice per month and you received an end-of-year bonus of $5,000 in the last paycheck. If you increase your pre-tax 401k contributions to 71% for that last paycheck, you would effectively save all of your $5,000 bonus amount. This would give you a large bump towards your retirement savings for the year and allow you to defer the taxes on these funds until retirement. 

Similarly, you could do this with an IRA if you do not have an employer sponsored 401k plan. The IRA contribution limits are much lower than for a 401k, so you need to be aware of how much you have contributed for the year. The nice thing about IRAs/Roth IRAs is that you have until the tax filing deadline to make your current tax year contribution. This means that for tax year 2022 you have until April 18, 2023 to make your IRA or Roth IRA contributions. The nice thing about the IRA/Roth IRA contributions is that it is often easier to make a one-time contribution into. Typically, you can quickly setup a bank account and transfer funds directly into the account or write a check to the company that custodies the funds (i.e. Fidelity, Charles Schwab, Vanguard, etc.). In the previous example, if you receive a $5,000 bonus it would technically be taxed before it hits your bank account but then if you contribute $5,000 into your traditional IRA you would be able to deduct the full $5,000 on your taxes. However, if you contribute the $5,000 to an after-tax Roth IRA, you would not get the tax deduction but the funds in that account would not be taxed again, even when you withdraw them in retirement.

HSAs are also great vehicles to use for tax savings at the end of the year. Similar to IRAs, you have until April 18, 2023 to make an HSA contribution that qualifies for tax year 2022. The catch is that you can only contribute to an HSA if you have been on a medical plan in 2022 that qualifies for an HSA, a high-deductible medical plan (HDHP). Check with your financial professional or Human Resources officer at work to see if you qualify. HSAs are unique in that they are triple-tax-advantaged. You get a deduction on the amount you contribute and if you use the funds for qualifying medical expenses at any point both the contributions and the gains are also free. And yes, an HSA account can be invested like a 401k in hopes of growing your funds. But make sure you keep your receipts for all qualified medical expenses that you withdraw funds for as the IRS can request proof of purchase on them.

In all of these circumstances, make sure you check to see what the contributions limit to each of these accounts are for the given year and ensure that you qualify to contribute to the account of your choice given your unique situation. In order to avoid a penalty and huge headache, please discuss these with your financial professional to see what might be most advantageous for you for the current tax year. If you would like to review anything mentioned above or another financial matter, especially if it is time sensitive as we head into the end of the year, don’t hesitate to reach out for a free consultation at [email protected]. I would love to chat and assess your unique situation holistically. Happy New Year!