Maximizing tax-advantaged accounts means utilizing them to their fullest potential in your portfolio, and that starts with ensuring that you are aware of all your options.
Today, investors are fortunate to have access to a wider variety of these tax-advantaged investment accounts than ever before. Once your financial goals are established and sufficient cash reserves are in place, funding these accounts is typically one of the first priorities in any effective cash flow plan.
However, unless you have a comprehensive strategy to make full use of the tax-advantaged accounts in your portfolio, you may not be getting all of the benefits from them.
Today’s blog discusses four strategies to consider, as well as state-specific information for Pennsylvania to take into account when developing your strategy.
4 Strategies for Maximizing Tax-Advantaged Accounts
First, it’s important to understand what a tax-advantaged account is and what it does for investors. These accounts set aside funds for future expenses, such as retirement or education, usually with very specific rules in place on how or when the money can be used.
In exchange for earmarking those funds for specific future expenses, they offer tax savings that can provide significant value in tax benefits over your lifetime. We will outline four key types of tax-advantaged accounts and how to use them effectively.
1. Start with Employer Retirement Plans
The first place to look is your employer-sponsored retirement plan — such as a 401(k), 403(b), or SIMPLE IRA. Many of these plans include employer matching contributions, which is essentially free money for your future. Most also offer both pre-tax and Roth contribution options, giving you flexibility in how your savings are taxed.
While the tax treatment is similar to a Traditional IRA or Roth IRA, employer retirement plans come with higher contribution limits and typically no income restrictions.
A smart funding strategy is to first contribute enough to receive your full employer match. From there, consider increasing your contribution rate alongside any annual salary increases.
For example, if you receive a 3% raise, boosting your retirement contribution by 1% each year allows your take-home pay to rise while steadily increasing your savings rate — a simple move that can make a significant difference over time.
2. Don’t Overlook Health Savings Accounts (HSAs)
Another powerful tax-advantaged account is the Health Savings Account (HSA), available to those enrolled in a high-deductible health plan. HSAs offer a unique triple tax advantage:
- Contributions are tax-deductible
- Investments grow tax-free
- Withdrawals for qualified medical expenses are tax-free
You can use these funds for current healthcare expenses or invest the balance for future medical costs in retirement. Like employer retirement plans, HSAs have no income limits to qualify for their tax benefits.
3. Traditional and Roth IRA Options
For those who don’t have access to an employer plan — or who are already maximizing it — Traditional IRAs and Roth IRAs are excellent additional tools. Anyone with earned income can contribute, though certain tax benefits are phased out at higher income levels.
- Traditional IRA: Offers a current-year tax deduction (if eligible) and tax-deferred growth, with taxes due upon withdrawal.
- Roth IRA: Contributions are made with after-tax dollars, but qualified withdrawals (after age 59½) are completely tax-free.
4. Save for Education with 529 Plans
Finally, 529 plans are a great way to save for future education costs. These accounts offer flexibility and generous tax benefits:
- Tax-free growth and tax-free withdrawals for qualified education expenses.
- No income restrictions on contributions.
- Funds can be used not only for college costs but also for K-12 private tuition (up to $10,000 per year, per child), certain apprenticeship programs, or even transferred to a Roth IRA for the beneficiary if specific criteria are met.
In Pennsylvania, contributions to a 529 plan are also deductible for state income tax purposes, adding an extra layer of benefit.
Final Thoughts: Are You Maximizing Tax-Advantaged Accounts?
While each of these tax-advantaged accounts includes penalties for non-qualified withdrawals, the potential tax savings make them incredibly valuable when used as intended.
Our team at Master’s is well-versed in these investment vehicles and ready to guide you through these decisions — helping you maximize tax efficiency as you work toward your long-term financial goals. Contact us to start a conversation.
