Strategic use of retirement accounts, HSAs, and other tax-sheltered savings vehicles to maximize your immediate tax savings while building long-term wealth.
Learning Objectives:
- Master the contribution limits and strategies for all major tax-advantaged accounts in 2025
- Understand when to choose Traditional vs. Roth accounts for optimal tax planning
- Learn how to leverage employer matches and catch-up contributions for maximum benefit
- Implement HSA strategies that provide triple tax advantages and retirement planning benefits
401(k) and 403(b) Plans: Your Tax-Saving Powerhouse
These employer-sponsored plans offer the highest contribution limits and immediate tax savings:
2025 Contribution Limits:
- Standard contribution: $22,500
- Catch-up contribution (age 50+): Additional $7,500
- Total potential: $30,000 for those 50 and older
Priority Strategy: Always Get the Full Match
If your employer offers matching contributions, this is guaranteed money. For example, if your employer matches 50% of contributions up to 6% of salary:
- On a $80,000 salary, contribute at least $4,800 (6%) to get the full $2,400 match
- That's an immediate 50% return on investment before any market gains
Traditional vs. Roth Decision Framework:
- Choose Traditional 401(k) if you're currently in a high tax bracket (22% or higher) and expect to be in a lower bracket in retirement
- Choose Roth 401(k) if you're early in your career, in a lower tax bracket now, or expect tax rates to increase
Advanced Strategy: Mega Backdoor Roth
If your plan allows after-tax contributions beyond the $22,500 limit:
- Total annual additions limit: $66,000 ($73,500 if 50+)
- Contribute after-tax dollars, then convert to Roth immediately
- Requires specific plan features, so check with HR
Individual Retirement Accounts (IRAs): Additional Tax Savings
2025 Contribution Limits:
- Standard contribution: $7,000
- Catch-up contribution (age 50+): Additional $1,000
- Total potential: $8,000 for those 50 and older
Traditional IRA Deduction Rules:
Your ability to deduct Traditional IRA contributions depends on income and whether you have an employer plan:
If you have a workplace plan:
- Full deduction: AGI under $73,000 (single) or $116,000 (married)
- Partial deduction: AGI $73,000-$83,000 (single) or $116,000-$136,000 (married)
- No deduction: AGI over $83,000 (single) or $136,000 (married)
Backdoor Roth IRA Strategy:
For high earners who can't contribute directly to a Roth IRA:
- Contribute $7,000 to a non-deductible Traditional IRA
- Immediately convert to Roth IRA
- Pay taxes only on any gains during conversion
- Backdoor Roth conversions allow unlimited Roth contributions regardless of income
HSAs provide the most tax-advantaged savings available—often called "triple tax-free":
2025 HSA Contribution Limits:
- Individual coverage: $4,300
- Family coverage: $8,550
- Catch-up contribution (age 55+): Additional $1,000
Triple Tax Advantage:
- Contributions: Tax-deductible (reduces current taxable income)
- Growth: Investments grow tax-free indefinitely
- Withdrawals: Tax-free for qualified medical expenses
HSA as Retirement Account Strategy:
After age 65, HSAs become even more powerful:
- Withdrawals for medical expenses remain tax-free
- Withdrawals for non-medical expenses are taxed as ordinary income (like a Traditional IRA)
- No required minimum distributions (RMDs)
Medical Expense Strategy:
- Pay current medical expenses out-of-pocket when possible
- Let HSA investments grow tax-free
- Save receipts to reimburse yourself decades later tax-free
- HSA investment options often include low-cost mutual funds
HSA Contribution Strategies:
- Contribute via payroll deduction to avoid FICA taxes (additional 7.65% savings)
- If self-employed, contributions are deductible on your tax return
- Family members can contribute to your HSA if you provide more than half their support
529 College Savings Plans: Tax-Free Education Funding
529 plans offer tax-free growth and withdrawals for qualified education expenses:
Key Benefits:
- No federal income limits on contributions
- Many states offer tax deductions for contributions
- Tax-free withdrawals for qualified education expenses
- Can change beneficiaries within family
Qualified Expenses (Tax-Free Withdrawals):
- Tuition and fees
- Room and board (if enrolled at least half-time)
- Books and supplies
- Computers and related technology
- Up to $10,000 annually for K-12 tuition
Strategy Tips:
- Research your state's specific 529 tax benefits
- Consider age-based investment options that become more conservative as beneficiary approaches college age
- Overfunded 529s can be transferred to family members or used for graduate school
Education Tax Credits vs. 529 Plans:
You can use both, but not for the same expenses:
- American Opportunity Tax Credit: Up to $2,500 credit for first four years
- Lifetime Learning Credit: Up to $2,000 credit for any post-secondary education
- Audit Current Contributions: Calculate your current contribution rates to all tax-advantaged accounts and compare to 2025 limits
- Maximize Employer Match: If you're not getting full employer matching, adjust your 401(k) contribution immediately
- Set Up HSA Strategy: If eligible for an HSA, open an account and set up automatic contributions to reach annual limits
- Plan Roth Conversions: Consider converting some Traditional IRA funds to Roth during lower-income years
- Research State 529 Benefits: Investigate your state's 529 plan tax benefits and contribution limits
Tax-advantaged accounts are your most powerful tools for reducing current taxes while building wealth. The combination of 401(k) contributions, IRA strategies, and HSA maximization can save high earners thousands in taxes annually.
Remember the priority order: employer match first (guaranteed return), then HSA maximum (triple tax benefit), then additional 401(k) contributions, then IRAs. Catch-up contributions for those 50+ can add significant additional tax savings.
Next Module Preview: We'll explore essential deductions and credits, including itemized deductions, business expenses, and valuable credits that can directly reduce your tax liability dollar-for-dollar.