Tax-Smart Strategies: Are You Maximizing Tax-Advantaged Accounts?

Tax-advantaged accounts provide a fantastic way to invest toward your long-term goals. Every dollar you don’t pay in tax is a dollar you can use to reach your goals. In this blog, which is part of a four-article series on tax-smart strategies, we look at some of the account types you can (and maybe should) be maxing out.

Make the most of your 401(k)

For most working Americans, employer-sponsored retirement accounts are the backbone of their retirement savings—whether it’s a 401(k) plan offered by a for-profit company, a 403(b) plan offered by a nonprofit employer or a 457 plan available from a state or local public employer.¹

Most of these plans allow you to contribute pre-tax money, which can be invested and allowed to grow over time, and eventually taxed when it is withdrawn. The 2024 contribution limit for most plans is $23,000, and those aged 50 and older may contribute an extra $7,500 for an all-in total of $30,500.²

If you’re seeking to max out your tax-advantaged retirement savings, this could be a great place to start—especially if your employer makes matching contributions on your behalf.

Find your way into a Roth IRA

Unlike a 401(k), contributions to a Roth IRA are made with after-tax dollars. Your investments  grow tax-free over time and are ultimately withdrawn without any tax consequences.³

If you’ve already maxed out your 401(k), a Roth IRA can be a great way to get more tax-advantaged savings working for you. Alternatively, if your current taxable income is lower than you expect it will be in your retirement years, you and your Corient Wealth Advisor might determine that a Roth IRA contribution, or using your company’s Roth 401(k) option (if one is available), may actually be preferable to a pre-tax 401(k).⁴

If you do wish to contribute to a Roth IRA in 2024, the limit is $7,000, with an additional $1,000 permitted if you are age 50 or older.⁵ There are a few ways you might approach your contribution:

• Contribute directly. You may be able to contribute directly to a Roth account if you are under the income limit. Single filers cannot contribute to a Roth IRA if they earn more than $161,000 in 2024. For married couples filing jointly, the income phase-out limit is $240,000.⁶ 
• Contribute through a “back door.” If your income is too high to contribute directly, you might be able to make a nondeductible contribution to a traditional IRA, then turn around and convert that contribution to a Roth IRA on a tax-neutral basis. This is commonly referred to as a “back door Roth.” There are several caveats to consider with this option, so be sure to consult your Corient Wealth Advisor first.⁷
• Contribute through your employer. Depending on your tax situation, and if your employer allows it, you may be able to make your 401(k) contributions on a Roth basis rather than a pre-tax basis. This could be especially powerful since 401(k) plans have a higher contribution limit ($23,000 in 2024, excluding the catch-up) than IRAs do ($7,000 in 2024, excluding the catch-up) which would allow more assets to be saved on a tax-free, Roth basis if that’s what your planning situation calls for.⁸

Make a healthy contribution to a Health Savings Account

If you have expenses for things like prescription drugs and medical, dental and vision care that are not reimbursed by your high-deductible health plan, a Health Savings Account (HSA) is a tax-advantaged account that might be able to help you out.⁹

In 2024, you or your employer may contribute up to $4,150 for individual coverage or $8,300 for family coverage.¹⁰ These contributions are invested in your HSA, and no tax is levied on your contributions, your earnings or any distributions that you use to pay for qualified medical expenses.¹¹

Study up on college plans

College plans—often called 529 plans because they come from Section 529 of the federal tax code—can help you pay for certain college education expenses using tax-advantaged savings.

Each state has its own plan and rules, so pay attention to whether or not your state allows a tax deduction for the contributions you make. In states where a tax deduction is allowed, these accounts are triple tax-advantaged: you get a deduction for your contributions, the assets in the account grow tax-deferred and the distributions are tax-free as long as they are used for qualified education expenses.¹²

If you’re concerned about tying up money in a 529 plan when you are unsure of whether the money will ultimately be used for college or not, take heart. Starting in 2024, up to $35,000 of leftover funds in a 529 account can be rolled over into a Roth IRA as long as it meets a few criteria, including the 529 account being at least 15 years old.¹³

All else being equal, investing in a tax-advantaged account has the potential to leave you with significantly more money in your pocket. Working with your Corient Wealth Advisor, you can gain a better understanding of which accounts are best for your specific situation, prioritize your use of them accordingly and take a helpful shortcut to reaching your financial goals.

Other articles in this series

• Are You Maximizing Tax-Advantaged Accounts? 
• Is Now a Good Time to Give Financial Gifts?
• Can You Take Advantage of Tax-Loss Harvesting?

¹ https://www.investopedia.com/ask/answers/100314/what-difference-between-401k-plan-and-457-plan.asp
² https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000#:~:text=Highlights%20of%20changes%20for%202024,to%20%247%2C000%2C%20up%20from%20%246%2C500.
³ https://www.investopedia.com/terms/r/rothira.asp
⁴ https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/
⁵ https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000#:~:text=Highlights%20of%20changes%20for%202024,to%20%247%2C000%2C%20up%20from%20%246%2C500.
⁶ https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000#:~:text=Highlights%20of%20changes%20for%202024,to%20%247%2C000%2C%20up%20from%20%246%2C500.
⁷ https://www.investopedia.com/terms/b/backdoor-roth-ira.asp
⁸ https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000#:~:text=Highlights%20of%20changes%20for%202024,to%20%247%2C000%2C%20up%20from%20%246%2C500.
⁹ https://www.investopedia.com/terms/h/hsa.asp
¹⁰ https://www.forbes.com/sites/davidrae/2023/12/07/what-are-the-new-2024-health-savings-accounts-hsa-limits/?sh=42550d1b42b8
¹¹ https://www.investopedia.com/terms/h/hsa.asp
¹² https://www.investopedia.com/terms/1/529plan.asp
¹³ Ibid.

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