Before we jump into this week’s Boost, we wanted to make sure you saw that Mezzi’s tax-loss harvesting feature was recently on Product Hunt. See what others are saying about Mezzi.
One of the best ways to build wealth and save on taxes is by contributing to a tax-advantaged account. As the end of the year approaches, we’re sharing some of the key deadlines and contribution limits.
First we’ll give an overview of the accounts, contribution limits, and deadlines. Then we’ll jump into an example of potential tax benefits. Keep in mind, this is just an overview and your personal employment, income, and tax situation are important factors for using these accounts.
🧠 What you need to know
Contribution limits and deadlines for various account types:
- 401K: You must make contributions through your employer’s plan and they are deducted from your paycheck. You don’t pay any taxes until you start withdrawing funds when you retire, at which point you pay the ordinary income tax rate. 2023 max contribution $22,500 ($27,000 if age 50+); All contributions must be done by December 31st.
- Roth 401K: Same details as a regular 401K but contributions are deducted from your paycheck after-tax.
- Solo 401K: For self-employed individuals with no employees. 2023 max contribution $61,000 ($67,500 if age 50+); If you contribute as an employee, you must do it by December 31st. If you contribute as the employer, then you have until April 15, 2024 or September 15, 2024 if you file an extension.
- Traditional IRA: Similar to a 401K, your contribution comes out of your pre-tax income and you don’t pay taxes on any gains until retirement. 2023 max contribution $6,500; deadline April 15th, 2024.
- Roth IRA: Your max $6,500 contribution comes out of your after-tax income. The difference vs. your Roth 401K is that you can contribute from your checking or savings accounts, or even transfer cash or stock from your taxable brokerage account. You won’t ever pay tax on any gains, as contributions are made with after-tax income.
- SEP IRA: For self-employed/small business owners; 2023 max contribution lesser of 25% of compensation or $61,000; deadline April 15th, 2024 (or October 15th with extension).
- SIMPLE IRA: Also a small business plan; 2023 max contribution $14,000 ($17,000 if age 50+); employee contributions by December 31st, employer by tax deadline.
HSA: Health Savings Account with triple tax benefits; 2023 max contribution $3,850 for individuals and $7,750 for families, plus an extra $1,000 if 55+; deadline April 15, 2024.
Coverdell ESA: For education expenses with tax-free growth; 2023 max contribution $2,000 per beneficiary; deadline April 15th, 2024.
Custodial Accounts (UGMA/UTMA): An investment account for minors. Gains up to $1,250 are tax-exempt and the next $1,250 of gains are taxed at the child’s tax rate. You can contribute at any time.
Example tax benefits
For simplicity, let’s say your tax rate is 25% now and also 25% in retirement. You are choosing between contributing $6,500 to a Traditional IRA and a Roth IRA. This $6,500 investment, compounded at 8% until you retire in 20 years would grow to $30,296. How do you evaluate which contribution is right for you?
Traditional IRA: You would save $1,625 on your 2023 taxes, given the 25% tax rate. However, when you withdraw the $30,296 during retirement, you would pay your retirement age tax rate. If it stays at 25%, you’d pay $7,574 in taxes when you withdraw it.
Roth IRA: You wouldn’t have any tax savings in 2023, however in retirement, you wouldn’t pay any tax when you withdraw the $30,296.
While the savings with the Roth are pretty significant, please keep in mind this is a simplified example. Your tax rate in retirement could be very different and your desire to save on taxes today instead of after retirement could also drive how you choose between the two. The same comparison applies to 401Ks and Roth 401Ks. You can also split your contribution between the two types of accounts.
🤝 How can Mezzi help?
Mezzi connects and syncs both your taxable and tax-advantaged or tax-deferred accounts. Some of the ways Mezzi can help:
- Seeing all of your family’s investment accounts in one place
- Evaluate your allocation across taxable, tax-deferred, and tax-advantaged accounts
- Compare returns between different account types
