The Ultimate Guide to Tax-Advantaged Savings Accounts for 2024

401(k) Plans and Variants

401(k) plans offer employees a tax-advantaged way to save for retirement. Key variants include Traditional 401(k)s with employer match features, Roth 401(k)s focusing on post-tax contributions, and Solo 401(k)s tailored for self-employed individuals.

Traditional 401(k) and Employer Match

Traditional 401(k) plans allow employees to contribute pre-tax income, reducing their taxable income for the year. Employers often incentivize participation through matching contributions, increasing the growth potential of the account.

For instance, an employer might match 50% of employee contributions up to a certain percentage, such as 6% of salary. This matching is essentially free money added to an individual’s retirement savings, greatly enhancing long-term financial security.

The contributions and earnings grow tax-deferred until withdrawal, typically at retirement age, when they are taxed as ordinary income. This deferment can be advantageous during peak earning years, as it may lead to significant tax savings.

Roth 401(k)

A Roth 401(k) is funded with after-tax dollars. While contributions do not reduce current taxable income, qualified withdrawals in retirement are tax-free.

This option can be particularly beneficial for those expecting to be in a higher tax bracket during retirement. By paying taxes on contributions now, individuals can enjoy tax-free income later.

The Roth 401(k) also provides flexibility for those planning ahead, as it combines the tax-free growth of a Roth IRA with higher contribution limits found in traditional 401(k) plans. It’s crucial for individuals to consider their current and future tax situations when deciding between a traditional and a Roth 401(k).

Solo 401(k)

Solo 401(k) plans cater to self-employed individuals and small business owners without full-time employees. They offer both employee and employer contribution options, allowing for potentially significant retirement savings.

The maximum contribution limit combines both personal contributions and profit-sharing contributions, providing flexibility to maximize savings. For instance, the individual can contribute as both an employee and an employer, substantially increasing the total amount.

Solo 401(k)s can also feature a Roth option, allowing for post-tax contributions. This option facilitates tax-free withdrawals during retirement, similar to a Roth 401(k). This flexibility makes Solo 401(k) plans an attractive choice for those working independently.

Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) offer tax advantages for individuals enrolled in high-deductible health plans (HDHPs). They provide a way to save money specifically for medical expenses, both immediate and future, with the benefit of tax-free growth.

Eligibility and Benefits

To open an HSA, an individual must be covered under a high-deductible health plan (HDHP). These plans have specific minimum deductible and maximum out-of-pocket cost requirements, which are set annually by the IRS. Individuals with other types of health coverage are not eligible. HSAs provide several tax advantages: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are not taxed.

Contributions can be made by both the individual and their employer, increasing the potential savings. The funds roll over each year, unlike flexible spending accounts, offering long-term growth opportunities. After reaching age 65, funds can be used for non-medical expenses, though they will be taxed as regular income.