The first involves state-based college savings plans. Those plans are best if you have a long time to let your contributions grow. But even if your student is about to head off to college, you may be able to wring a last-minute benefit. Most states offer deductions or credits on your taxes if you are saving for higher education, and they don’t limit the amount of time you have to build your fund. You can put money in and take it out again shortly to reap the benefit. A few states require that you have the money in the education account for at least a year before qualify for the deduction. Contact your plan or go to SavingForCollege to get the specifics.
Health Savings Accounts, designed to help pay the consumer’s share of medical costs, also have a built-in tax break. The contributions are deductible as you pay them and stay tax-deferred as the account builds; withdrawals are tax-free as long as they are used for the qualified medical expenses. Some experts suggest a health savings account even if contributions to a 401(k) fall short of the full amount matched by the employer. The trick, though, it to leave the health savings account alone so it can grow the maximum amount possible. That leaves you to pay deductibles and copays out of pocket. Do the math and see where the break-even point comes.
Roth IRAs give you the ability to withdraw money tax-free in your retirement. That’s a huge advantage if you have kept your IRA intact and let it grow through compounding. There is a limit, however, on IRAs. The limit is $133,000 for an individual (as of 2017) and $196,000 for married couples filing jointly. Taxpayers can get around those limits by contributing first to a traditional IRA and then converting to Roth IRAs, since there is no limit on Roth conversions. Income taxes generally apply to conversions, but the bill could be low, even zero, if you don’t take a deduction and don’t have much money in IRAs outside the one being converted. The IRS bases the tax on a conversion on the proportion of the taxpayer’s IRA holdings that have not yet been taxed.
There are additional IRA manipulations you can do to maximize your tax advantage, but the maneuvering becomes more complex. A visit with a tax accountant might be advisable when he being to contemplate “mega backdoor Roths.”
