In uncertain financial times, one thing is for sure: Maximizing your year-end tax deferrals is a great way to save money. Not only will this improve your tax situation in the current year but offers an opportunity to lay the foundation for additional retirement and personal savings. Let’s explore some of the best available and most popular year-end options for year-end tax deferrals that also allow you to plan for your future.
401(k) plans are widely used retirement savings plans that allow you to defer income in the current year. They have a high contribution limit of $20,500, and contributors over 50 can add another $6,500. And these limits increase each year, with 2023 rising to $22,500, and a catch-up contribution of $7,500 for anyone over 50. These plans are usually offered through an employer, who often matches a certain percentage of the employee contribution, offering an even greater possibility for retirement savings.
An Individual Retirement Account (IRA) is another tax deferred retirement savings account that offers an opportunity to build a nest egg. Whether or not the money can be tax deferred depends on your income and whether your spouse participates in an employer retirement plan. Upon retirement, the expectation is the taxpayer will be in a lower tax bracket, so when IRA funds are distributed, the tax burden will be much lower than if that money was taxed while the individual was still in the workforce. IRAs are a great way to not only improve your current year tax situation, but also set yourself up for lower taxes on future distributions.
A Health Savings Account (HSA) is a smart way to save money for qualified health expenses now, while also offering a chance for tax savings. A taxpayer is allowed to deduct HSA contributions up to predetermined annual contribution limits, which in 2022 are $3,650 for individuals and $7,300 for family coverage. Not only do these contributions provide a deduction, but they also create an account to use for a wide range of medical expenses throughout the year.
Maryland 529 Plans
Maryland 529 college savings plans are an opportunity to save for your child’s future education, while also offering a Maryland State income deduction for each year that contributions are made. There are two different 529 plans to choose from: the Maryland Prepaid College Trust and the Maryland College Investment Plan. Both plans offer tax savings in Maryland with the ability to deduct up to $2,500 per account, per year. And with tuition costs steadily rising, they give you the ability to start saving for college today.
The Maryland Prepaid College Trust plan is an opportunity to pre-purchase tuition at today’s prices, whether it’s as little as one semester, or up to four years. Payments are invested, with all earnings being tax-free if used for qualified education expenses.
The Maryland College Investment Plan offers a little more flexibility in terms of contribution amounts and how to invest. Like the prepaid plan, all earnings are tax-free if they are used for qualified education expenses. When it’s time to pay for college, the funds can be used to pick up qualified costs. Any excess contributions that you are unable to deduct in the tax year can be carried forward to future years to help offset your income.
When it comes to year-end tax planning, it’s important to be familiar with the myriad of options to minimize your tax in the current year, while also setting yourself up for a more comfortable retirement. Talk to a tax advisor today to learn what options work best and how you can improve your current financial situation, while setting yourself up for a comfortable retirement down the road.