We all have to pay taxes unless you are poor or very clever. However, the government provides many rules to benefit the observant taxpayer. Some may say they are loopholes, but I like to think of it as a game they created to help us save for retirement.
Pre-tax
401K: Hopefully your company offers a 401K, but it is no requirement of them. The public sector version of this is a 403b which works very similarly. There is also a 457b which seems to be like both as well. Each of these accounts can defer $19,000 of income for each account. If you are over 50 your limit is increased by $6,000.
HSA: This account is one of the most favorable for taxes and if you have one through your employer then I would highly recommend reading the Mad Fientist article. I’m not so convinced, but I don’t have to worry about it because neither of our employers offer it. The annual limit is $3,500.
FSA: This account allows you put pre-tax money to use for qualified medical expenses. This could be a surgery, a doctor’s office copay, prescriptions, and more. The annual limit you can put in is $2,700. One nice thing about these accounts is that all the money is available at the beginning of your plan year and the money is deducted from your paycheck over a year. This can actually lead to situations where you get more than you put in if you leave the company. One downside to this account is it is a use is or loss it. Some accounts may allow you to carry over $500 to the next year, so check with your provider. If you put in $2,000 and don’t have a single expense you just wasted $2,000. However, there are ways to blow money if you need to like buying a pair of ridiculously expensive glasses or getting braces.
Dependent Care FSA: This is also a use it or lose it account that can only be used for childcare expenses. The annual limit is $5,000 per family. Note that if you use this account you cannot take the child dependent care credit on your taxes.
IRA: An Individual Retirement Account is a way to save for retirement. Each year you can put in $6,000, unless you are over 50 your limit is increased by $1,000. One good thing about this account is that it doesn’t require anything from your employer, you can set it up all yourself. You just need earned income to contribute.
Commuter benefit: This allows you to put money aside for transportation to and from work such as a subway pass. The limit on this account is $265 a month.
Medical premiums: If you are able to pay your medical insurance premiums for your employer-sponsored plan through payroll deductions, then they are tax-free. The US healthcare system is so expensive, so getting even a little bit of a break is nice.
Post-tax
After-tax 401K: Some employers allow you to put money in your an after-tax 401k. The limit varies by plan and can be as high as $37,o00. The money you put in this account can grow tax-free.
Roth 401K: Same as 401K, but you pay tax on the money now and then whatever you take out you don’t have to pay taxes on. Also has a $19,000 limit. If you plan allows you to split between Roth and normal, the limit is a combined $19,000.
Roth IRA: 401K is to Roth 401K as IRA is to Roth IRA.
Our Best Situation
Our marginal income is in the 22% tax bracket, so any pre-tax items would save us 22% in taxes.
401K: $19,000
403b: $19,000
457b: $19,000
IRA: $6,000 * 2
We don’t have access to an HSA and no children so we don’t use the dependent care FSA. We put $1,000 in our FSA because the plan allows $500 rollover.
Medical premiums are around $800 which is probably as low as I’ve heard of. We don’t use the commuter benefit.
The tax savings on the above is $15,576! In fact, this would kick us down to the 12% tax bracket so perhaps a bit less. If you live where there is state income tax, then your savings could be even greater. Unfortunately we aren’t able to save $69K annually as we have to pay for housing and much more. Going even crazier, my work allows for an additional $27,500 in after-tax 401k contributions. That means we could have $96,500 of tax-advantaged contributions a year.
Conclusion
If your employer offers these accounts and you can take advantage of them, then great, you can save some money on taxes. If not, there are still IRAs and the child dependent care credit. As our income increases I would love to get closer to saving $96,500 annually, but it is not the time.
Also, the limits for many of these accounts go up by $500 every few years which is good for those who can max out. One thing to be wary about is that money that goes into retirement accounts can’t just be used for anything and will incur penalties if you use it before turning 59 1/2. However, there are some methods to get at it. Anyway, you should be careful not to have so much money in your retirement account that you aren’t able to pay for something that comes up.