Finding the Best Tax-Advantaged Accounts for You

We all have to pay taxes — you know the old cliché — but it’s wise to consider an investment strategy that minimizes your taxes as much as legally possible. Tax-advantaged accounts are one way to do that. Here are some tips for choosing the right accounts for your situation.

What is a tax-advantaged account?

401(k), 403(b), 457, IRA, HSA — You’re likely familiar with many of these retirement savings accounts that fall in the tax-advantaged box. “Tax-advantaged” means you’ll reap tax benefits in the form of tax exemptions or tax deferrals.

There are two types of these accounts:

Tax-deferred (also known as pre-tax): You put money into these accounts and don’t have to pay taxes until years later when you withdraw funds. You also receive a tax deduction for contributions. Examples include your traditional 401(k) and IRA accounts, as well as 457 and 403(b) plans.

After-tax: Your contributions to these accounts are made with funds you’ve already paid taxes on. You pay taxes up front, there’s no deduction available for contribution, and you don’t have to pay additional taxes on earnings later. Examples include any Roth-type account (such as a Roth IRA or Roth 401(k)) and 529 plans.

Maximizing accounts to maximize value

Just as you diversify your investments to help mitigate risk, tax-diversification can be beneficial, as well.

High-income earners have a wide range of choices when it comes to maximizing the value of their accounts and contributing to more than one type. You already have the savings and investing basics taken care of, like emergency funds, college savings, and maxing out your contributions to your 401(k), for instance.

Now saving becomes more about saving for the retirement life you want and for any other future financial goals, such as building family wealth.

If this is your situation, then you’re looking not at selecting one tax-advantaged account over another, but rather prioritizing your contributions to a number of accounts so that you are maximizing your growth.

Which to prioritize comes down to several factors that you’ll want to rank hierarchically, including:

  1. Your income
  2. Current and future (expected) tax brackets
  3. Your financial goals
  4. Time horizons

In addition, you’ll want to set a different contribution strategy for each account, looking at things like annual contribution limits, investment options offered, as well as potential tax benefits or savings.

Start by asking yourself these questions and meeting with your wealth advisor

Your wealth advisor can help you determine the best strategy for selecting and prioritizing contributions to your tax-advantaged accounts.

  • Which accounts are you eligible for?
  • Does your employer offer a 401(k) and a match on your contributions?
  • What other employer-sponsored plans are available to you?
  • If you’re married, what plans does your spouse have available via their employer?
  • What are the various contribution limits for each account?
  • What are the penalties or rules about distribution and use of funds for the accounts you’re considering?

Once you know the answers to these questions, you’ll be in a position to have a conversation with your advisor about how to strategize your contributions in the most advantageous way possible.

Of course, taxes aren’t your only consideration and every investment and savings option should be considered in the context of your overarching financial plan. But it definitely makes sense to take the opportunities available to you to be as tax-efficient as possible in your investing.

Ironwood Wealth Management can help you determine the most tax-efficient investing strategies for your goals and financial situation. Give us a call to get started today.