Over $34k in tax deductions for Investing?

Imagine a world where you don’t HAVE to work another day in your life if you didn’t want to. Imagine how much of a burden it would lift to know, even if you never invested or saved another cent, you have more than enough to retire and continue caring for your family.

This concept might seem like a fairytale to some and to others it might seem like I’m going a little crazy… but i’m not! This is very real. It’s called financial freedom, and it happens to be my goal with all of this investing and saving that I do. The easiest place to get started investing is in the stock market. The quickest way at to learn how is at my free beginner class on Monday, register here.

But what does investing have to do with saving money on taxes??? A LOT!

See, the government WANTS you to save for your retirement. Let’s face it, Social Security may be around for some of us. for others it’s questionable. So in order to get you to save for your retirement, they need to incentivize you… with tax savings.

That’s how a lot of these retirement accounts work. Depending on the type of account, you generally either get a tax deduction when you contribute to an account or you get tax free distributions at retirement. Lets look at the accounts in more detail 👇

Traditional 401k

This is a retirement plan offered by an employer, so you can’t open this on your own. Employees can contribute pre tax wages to the plan, this means that your taxable income will be lowered so you will get taxed on less. However, distributions are generally taxed at withdrawal. So while you may get a tax deduction to contribute, you will get taxed at some point in the future. This applies to initial contributions plus any account gains. For 2024 you can contribute up to $23,000.

Roth 401k

Works very similar to the traditional 401K, however, there are tax differences. For the Roth 401K, you do NOT get a tax deduction on contributions, but you get tax free distributions at retirement. This tax free treatment applies to initial contributions and any account growth. There are a few other small nuances that differ from the traditional 401K, but for 2024 you can also contribute up to $23,000.

Traditional IRA

This is also a retirement account, but this is an individual account so a person can open one on their own. Contributions are generally tax deductible but deductions have income limitations. If your income is more than $123,000 but less than $143,000 for a married couple filing a joint return or a qualifying surviving spouse (these numbers vary by filing status), your deductions may be limited. If your income is above that threshold, you may not be eligible for any deduction. Generally, funds are not taxed, including earnings and gains, until you take a distribution. For 2024, you can contribute $7,000 ($8,000 if age 50+). See IRS guidance on IRAs here.

Roth IRA

Works very similar to the traditional IRA, however, there are tax differences and income limits for contributions. For the Roth IRA, you do NOT get a tax deduction on contributions, but you get tax free distributions at retirement. This tax free treatment applies to initial contributions and any account growth. There are a few other small nuances that differ from the traditional IRA, but for 2024 you can also contribute up to $7,000 ($8,000 if age 50+). See IRS guidance on IRAs here.

HSA

Last, my personal favorite investing account, the Health Savings Account. The way this account works is this it’s s meant to allow individuals to use tax free money to cover medical expenses. Generally, you get a tax deduction when you contribute funds into the account, you need a qualified high deductible health plan to be eligible. Next, the HSA funds can be used tax free to cover qualified medical expenses. You may have heard this all, but did you know you you don’t HAVE to use the money on medical expenses right away?

The way I use it, though… invest it 👇

I don’t swipe my medical expenses. Instead, I pay for those expenses out of pocket and make sure I save all my receipts and documentation. The invested money can grow tax free. Next, once the money has had a chance to grow, I can spend it tax free - again, on qualified medical expenses. I can either swipe my card for medical expenses that come up, or I can reimburse myself from the HSA for all the medical receipts I’ve paid out of pocket over the years since having the HSA - TAX FREE, because the expense I am reimbursed for IS a qualified medical expense. This last 👆 paragraph is optional, but it gives me 3 tax benefits that, in my eyes, make it the best investing account. For 2024 you can contribution up to $4,150 (individuals), $8,300 (families), +$1,000 if 50 or older. For more details on HSA accounts, click here for the IRS site.

That’s potentially up to $34,000 in tax deductions for individuals! Now, saying an individual can contribute to, and deduct, all 3 might be a stretch since the IRA has deduction limits. But the 401k and HSA don’t have income limits for contributions so that’s still over $27,000 of potential deductions.

Everyone wants the “secret” loophole. But THIS is what’s available to most people. Yes, there are tons of other tax savings strategies and tools that are available to business owners, but if you don’t have a business, you don’t have many options. This is why it’s important to invest! It helps save for our future, and could get you some tax savings either today or at retirement.

What are you waiting for to take action? Another year to go by? The longer you wait to get started, the harder it will be to create wealth. If you want to learn more about getting started investing in these kinds of accounts, I’m hosting a free beginner class on Monday 12/30 with a financial advisor. The class is free but spots are limited. Hurry, reserve you spot here before seats fill up. My next class won’t be until May 2025!

See you next week!

-Neyra

*** Please remember that while I am a CPA, I am not YOUR CPA. This content is for educational purposes only, please seek the advice of tax, legal, and finance professionals on any financial decision you contemplate***