How can investing help lower your taxes?
Yes, investing is a great way to grow wealth, but there are also a lot of tax-saving benefits too!
Investments made in certain accounts allow you to deduct contributions when you file your taxes. This means you are lowering your taxable income, and making the pile of money you owe taxes on smaller. Smaller pile? Less taxes. (Legally).
Watch my video below where I share the three accounts you can invest in to lower your taxes!
1. Lower your taxes by investing in a 401k or 403b
401k's and 403b's are the some of the most common places to save for retirement. These plans are set up by an employer and likely have the option for contributions to be taken directly from your paycheck!
If you have access to an employer account, make sure you understand how to enroll or manage your contributions. Deadlines for contributions to this account are at the end of the year, or December 31st.
2. Lower taxes by investing in a Traditional or SEP IRA
If you don't have access to an employer plan, fear not! There are still tax-savings retirement options out there.
The Traditional IRA (Individual Retirement Account) is set up on an individual basis, and has an annual limit of $6,000 per year.
The SEP IRA can be opened by people who have self-employment income, and has a higher annual limit. You can contribute up to 25% of self-employment income, up to a max of $57,000 for 2020 and $58,000 for 2021.
The deadline for IRA contributions is further out than the 401k or 403b, and you have until Tax Day, or April 15th, of the following year to contribute for the prior year!
Example: You have until April 15th, 2021 to make contributions in your IRA for 2020.
3. Lower your taxes by contributing to an HSA
Saving and investing in a Health Savings Account is another great way to lower your taxable income!
You will be able to deduct contributions, experience tax-free growth from investing your money inside the account, and then make tax-free withdrawals to pay for qualifying medical expenses.
The annual limit for HSA's is $3550 for singles and $7100 for families for 2020 and increased to $3600 for singles and $7200 for families.
Grab your free 2020 Cheat Sheet!
The year might be over, but the taxes aren't! Grab your free download of my handy, Financial Cheat Sheet below!
Cheat sheet includes 2020 retirement contribution limits, Roth IRA income Phase-outs, Traditional IRA deduction rules, 2020 tax brackets, common tax deductions if you're self-employed and more!
Hi, I'm Alicia, welcome to Friend of Finance! This site is a way for me to share helpful things I've learned from working in the financial industry, important money things that I probably wouldn't have learned otherwise, and things everyone should know about.