Folks, I know what you’re whispering when I walk into the room: “That guy really knows his tax-advantaged accounts.”
It’s my one superpower. (Well, I’m also pretty good at making omelets.)
A New Year is upon us and now is the time to tell you what you need to know about tax-advantaged accounts for 2013.
Unless you’re in the process of paying down high-interest debt, you’ll save a bundle by using these accounts, many of which have higher contribution limits this year.
Who says the IRS never did anything for you?
Note: Contribution limits are per-person except where otherwise noted, and you can’t contribute to some of these accounts if your income is too high.
Contribution limit: $17,500 (up $500 from 2012) ; Catch-up contribution for age 50 and up: $5500
The 401(k) is the main retirement savings vehicle for most Americans who work for a boss and receive a W-2 at tax time.
Many employers offer matching contributions, which you should never turn down, and which don’t count toward your contribution limit.
If you’re self-employed with no employees other than your spouse, you can open a Solo 401(k) and pack away big money.
The main drawback of the 401(k) is that you have to choose your investment options within the account. Those options can be confusing and expensive.
But it’s getting easier to see what you’re paying for your 401(k) and choose low-cost funds, thanks to new federal regulations that went into effect last year.
IRA and Roth IRA
Contribution limit: $5500 (up $500 from 2012) ; Catch-up contribution for age 50 and up: $1000
You’re probably up on these, too. You open an IRA yourself via a brokerage or mutual fund company, and can invest it in almost anything you want: stocks, bonds, mutual funds, and even precious metals.
For most people, a Roth IRA provides the most flexibility, and you can choose a low-cost target-date retirement fund that will take care of the investment details for you.
529 College Savings Plan
Contribution limit: $14,000 federal gift tax exclusion (up $1000 from 2012)
529 plans are generally good and getting better. Every time we round up the best, more plans have lowered their fees and expenses.
And the contribution limits on most plans are so high, almost nobody is in danger of maxing them out.
You don’t have to use your own state’s 529 plan; you can choose from any state. Look for low investment costs, and check whether your own state offers a tax deduction for contributing.
That’s free money, as sure as a 401(k) match.
Contributing to a 529 is something you do only after you’re saving aggressively for retirement. Your children may be eligible for both grants and loans for college; you’ll get neither for retirement.
Health Savings Account (HSA)
Contribution limit: $3250 for an individual (up $150 from 2012) or $6450 for a family (up $200 from 2012)
The HSA is the most tax-friendly of all the accounts here. You get a tax break for contributing, and you pay no tax when you withdraw, either, as long as you use the money for medical expenses.
There’s a catch, of course: you can only open an HSA if you have a high-deductible health plan, meaning a minimum $1250 deductible per person or $2400 for a family.
And that means you have to put money in the HSA that would have otherwise gone to insurance premiums, because every doctor visit is coming out of your pocket until you hit that deductible.
Then there’s another catch: You have to choose an HSA provider, and most of them charge absurdly high fees.
Among the cheapest providers is Health Savings Administrators, which charges $45 annually plus minimal investment fees.
Contribution limit: $10,000
This isn’t a type of account; it’s a savings bond sold by the US Treasury via their TreasuryDirect website.
But they’re tax-deferred (you don’t pay tax every year, only when you cash in the bond), and tax-free when used for a child’s education.
Unlike CDs or savings accounts, I-bonds are guaranteed to pay at least the rate of inflation. That makes them about the best deal out there for your cash savings.
Right now, for example, I-bonds are paying 1.76%; the best 1-year CDs are paying about 1%.
So there you have it. If you max out every one of these accounts, you will have saved more than the GDP of some countries. People will be talking about you at parties.
Now, what would you like in your omelet?