Disclaimer: Tax evasion is illegal; tax avoidance is not. I am not a CPA, financial advisor or tax attorney. Please consult a professional for personal advice.
Who doesn't want to save money on taxes? Here are a few ways we can do this!
Health Savings Account (HSA). If you have an option to do this, it is a good idea. Why? Because you can put money in pre-tax, and invest it until you need it for medical costs. If you spend it on medical, it is tax-free on the way out too. It also rolls over, so you never lose it, and you can transfer it if you leave a job. Some jobs offer this, but even if others do not, you can still get one on your own and get a tax write off at the end of the year. For 2024, you can put up to $4,150 for singles or $8,300 for families. If you do not use it on medical by the time you are 65, you can withdraw it with no penalty for any reason, but you do have to pay tax. You can also pass it on when you die; for a spouse it will be tax free, but if it is to another, they will have to pay income tax on the proceeds.
Who can invest in an HSA? If you have a high deductible health plan (HDHP), you can invest, even if your employer does not offer this. You can open an account at Fidelity or various other brokerages fairly easily. Once opened, you can transfer money in, and they will keep track of how far you are from the cap.
Donations. If you donate regularly, it may be worth doing it all in one year rather than year after year, especially if that amount is higher than the standard deduction. For example, if you donate $3,000 a year, consider donating $30,000 this year and nothing for the next ten years. I know this is a lot, but it could save you money on taxes if you can afford to make a bigger contribution in one year. You can also open an investment account (called a DAF) where you can put all of the money this year and then donate a little bit each year to the charity or charities of your choice.
The other thing you can do is donate stock. Let's say for instance you bought $1,000 worth of Nvidia ten years ago, and now it is worth over $300,000 (don't you wish?) If you sold $30,000 worth, you would have to pay capital gains taxes on somewhere around $29,900 in profits. But if you donated $30,000, you would get to write off a $30,000 donation, and you would still have $270,000 worth of NVDA. So you would kind of "save twice" on being taxed.
Speaking of capital gains. For those of you who don't invest, there are many good reasons to do so. One of them is that you can play the system in several ways.
Way #1: Harvest losses. You can sell any stock that has a loss and claim up to $3,000 in losses each year against your ordinary income. What does this mean? This means that if your taxable income is $50,000, by having a loss of $3,000, it brings this down to $47,000, thus lowering your taxes by roughly $1,000 if you are getting taxed 30%. You can buy the stock back after 30 days and still keep it, but you can "harvest" the loss first. Many people do this every year!
Way #2: Step up in basis. If you have stock, like NVDA, that has gone up in price a lot, you can save this for your heirs, and when you pass it on to them, it is as if they bought it on the day of your death. This means that if your heir gets your NVDA and they sell it a day after you die, they do not have to pay any taxes on the gains.
This is also a rule for property, so if you pass on your property to your heirs, they will also get a step up in basis, and the "price they paid" or their "cost basis" will be as of the day of your death.
On the flip side, if you have something that has a big loss, this may be used to offset a gain you have somewhere else, so may be worth selling before you pass away rather than giving this to your heirs. Capital gains on sales net off, so if you needed some income for example, you could sell one thing with a loss and one with a gain so that you have proceeds but don't have any tax implications. Also, losses carry over, so if you sell something and get a $10,000 loss but only take $3,000 against your income, you will have $7,000 in losses left for next year (and beyond).
Way #3: Harvest gains. If you have a stock like NVDA, and you cannot afford to pass it on to your heirs, it may make sense to wait until you are not working any more to sell it. By doing this, you don't have any (or have very little) income coming in and you can sell it little by little so that you don't get into a higher tax bracket. Also, if you make less than a certain amount (for 2024 this is $47,025 for singles and $94,050 for married people), your capital gains are taxed at 0%. So basically, if your social security is $2,000 a month ($24,000/year), as a single, you could sell enough (to have less than $23,025 in gains) to stay below the cap and you would not pay taxes on any of those gains (you will still pay tax on your SS income, but this is beyond the scope of this post).
Last but not least, in investing, it is good to have a little of each account type (IRA/401k, Roth IRA, regular taxable brokerage account, regular savings account) so that you can make the most of them depending on your situation. Especially if you are going to stop working before 59.5 which is the age you can usually take from your retirement accounts without penalty. However, there are ways to make it all work, and to save money on taxes too by having one of each account and taking from each depending on your particular timing.
The other thing you may not realize is that at a certain point you are required to withdraw from your retirement account (currently it is 73 but it keeps changing and is supposed to change to 75 in 2033). This is called an RMD (requirement minimum distribution); depending on how much you have in your retirement account, it may make sense to withdraw a little each year after you are 59.5 so that you are not hit by a larger amount later on. This may not be an issue, but it is worth keeping an eye on.
Do you do any of the above things? Do you have any investment accounts? At what age do you plan on retiring?
I just want you to come and manage all my finances, Kyria.
ReplyDeleteWe donate about 10% of our net income, so definitely do maximize the charitable donation deductions.
I didn't know you could donate stock, though! Smart.
We have some RRSP's (get a tax break now, pay later) but most of our money is in TFSA's which gains interest on already taxed income, so there is no tax on interest. Rates are pretty good right now, so we've tossed a chunk into a 1-year GIC at 4%. That said, we do need to be more strategic with taxes and how we move money around and invest. We're working with an investment banker and will make some changes. We have quite a bit of control since we are self-employed and get to invest both corporate and personal money...but it's also tricky because we have to navigate the different tax rates, weigh benefits of salaries vs. dividends...
Our current accountant is fine, but will never take us to the next level, so that's yet another to-do. Sigh.
Again...just move here, please? Haha.
Yeah, if you play it right, you can save by putting money into a TFSA (Roth) when your tax bracket is lower and into an RRSP (401k) when your bracket is higher (and hopefully you will withdraw when it is lower), so most of us should do both! By working for yourself you have more moving pieces, but also more opportunities to save on taxes if you do it right! Definitely it is important to have someone who knows what they are doing helping you, even if it "costs" you. You need to get to the next level!
DeleteDonating stock is a good idea, and some charities will let you donate the stock right to them, and they will of course sell it afterward. Or you may have to open an account for that if you want to donate to many smaller charities. But even some churches will let you donate stock!
We max out our HSA donations and also have tax loss harvested although we don't have any tax loss opportunities this year as our fixed income funds have done quite well this year. You didn't mention buying municipals for non-qualified accounts! That is something we have focused on for the last several years. The FA we met with told us we needed to focus on investing in qualified accounts since we've maxed out our qualified investments for many years. So in our brokerage accounts, we mostly buy equities, municipals, and preferreds. I manage the fixed income investments, Phil manages the equity ones for the most part. We do not own any individual stocks, though, or not that I know of. It's extremely hard to trade them since we need compliance approval from both firms. It's easy for Phil to get an ok, it's nearly impossible for me. They had a trading holiday a few years ago when we went through a reorg so Phil took that opportunity to move out of nearly all of his individual stock positions. Before we were acquired by TIAA, you could trade a certain number of shares for large cap companies but TIAA had a far more restrictive policy so now it's just impossible to trade stocks.
ReplyDeleteWe also make donations as well. I think the change in the standard deduction has meant that we haven't ended up itemizing the last several years, though? But Phil entirely handles our taxes so I am not 100% sure about that. But no matter what, our tax bill is SO HUGE.
I hope to retire in my early 50s!
What I did not realize for a long time re HSAs is that you could have one even if your employer did not offer it as long as you had a HDHP. So I should have been investing in that more, but didn't. "Luckily" I did have some individual stocks that did poorly, so I had a little bit of harvesting to do!
DeleteGood point re Munis. I also have Munis in my taxable, but that seemed beyond the scope of this post (I did not want to get too far into the weeds re investing). Like you, I also don't have any income producing securities in my taxable (only qualified dividends or tax free income).
Yeah for donating, it is hard to be above the standard deduction now, but if you were itemizing (which I was when I owned a house and was paying interest etc.), then it is worth doing! Or if you can donate enough in one year to get over the deduction, it could make sense. Early 50s sounds perfect; you are almost there; it is good that you are focusing more on your taxable accounts then, as they will come in handy during the gap!
Team HSA! I had an HDHP for years and as my income went up, I was very happy to get the tax break by shoveling money into my HSA. Then I changed jobs and haven't had a good HDHP option since because the max out of pocket is higher than the HSA limit. In the meantime, we've used the HSA for all of our medical expenses and it's done a very nice job of regrowing itself as we spend. Yeah yeah I know we could have let the money grow for later, and maybe at some point we'll pause on withdrawing, but psychologically it's been good for me to see the effect of withdrawing from an investment on the overall balance.
ReplyDeleteBig donations and harvesting...that's above my pay grade right now. When I hear about these things I take notes for the future, but right now I'm not donating anywhere near $3k let alone $30k...
If I had my life to live over, I would have done Roth instead of regular IRA/401k....oh wait I wouldn't because Roth didn't exist back when I started my first IRA. But you know what I'm saying, it's a great thing for kids nowadays to do a Roth when their income is low. Right now the tax break is just too sweet to pass up, so we do regular 401k and our taxes in retirement will be a problem for Future Us to solve. With that said, I might do a Roth next year just to dip my toes in the water. If I follow through on my plan to stop working, our income will be down so our taxes will be down. Then another project for Future Me is to figure out what makes sense for Roth conversions. Good times ahead!
If you are going to retire before you are 59.5, it actually makes sense to put your money into the IRA/401k pre-tax now, as you will be able to save on taxes later by doing timely Roth conversions, so I think the fact that you did not put money into a Roth as early is not a huge deal. I know you can get tax free withdrawals, so it is good to have some funds in a Roth, but you will be able to convert later and will be happy enough! I agree that kids or low earners should do a Roth when their taxes are low!
DeleteThe only thing that is a bummer (? first world problems) is that when you do not have "earned" income you cannot contribute, so it may be perfect for you next year if you work half a year because you will have earned income but your salary will not be so high to bump you out of being eligible to contribute to a Roth. So you could potentially contribute to your 401k and a Roth next year. However, in 2026 you may have an issue. Wait, is hubs going to keep working? If so, I think you may be able to use his earned income to contribute to your Roth if you file jointly. Actually if he is still working, that will be interesting re Roth conversions. Oooh. This is going to be exciting.
I love this! (And have loved your prior week's posts but I was traveling and didn't have time to comment.)
ReplyDeleteHSA -- I didn't realize that you could set one up yourself! I don't think we had a high-deductible plan, though, so I didn't look into it at all. I will keep this in mind to recommend to others who may be able to take advantage of it.
I wish I had more money in Roth but yes, it wasn't around when I first started. But I'm putting as much as I can for my son while he's not earning much yet. Time is his friend, too, as he's still young -- so even though he worked only some summers while in school, I put all of his earned income to his Roth; he only put some of his earnings but mom&dad maximized his Roth. LOL He just got hired (his first after graduation - I'm so happy for him!) and I'm curious what benefits he will get. I know he mentioned stock options is one of them. I'm excited to see him grow his nest egg.
We've always had a tax guy but we're going to do it again this year ourselves. We don't have complicated returns anymore so I think 2 accountants in the house should be able to figure it out? LOL Taxes is not our area of expertise so we were happy to have someone else do it for us for many years. I used to do our taxes many, many years ago when my husband was self-employed and the tax breaks were great, I thought. And I thought TurboTax did a pretty good job with it so we will use it again.
I did the tax loss harvesting this year -- and managed to bring our taxable income down to the bracket I want so yay! I know what you mean about "lucky" to have tax loss to harvest. Argh...hate to see that loss but at least it helps in other ways.
Oh, I didn't realize that stocks also have a stepped-up basis! I knew about real property but didn't realize this is the case for stocks, too....good to know!
These are all great, Kyria. Taxes are so high -- so anytime you can do something that helps lower it is great. The tax donating is a great way -- a win for you and a win for your charity of choice.
I actually did not realize I could have set up an HSA for myself much earlier in life either, and I wish I would have known that. Even if you never use it, you can pass it on, but with the costs of healthcare these days, I think it's a good thing to have waiting in the wings. And forget it if you are going to live in any kind of assisted facility; my grandma went into the most basic kind of senior living apartment and it was $6,000 per month! That will eat up your nest egg quite fast!
DeleteI think helping your child put money into a Roth is a great way to build their nest egg and to teach them how to start investing. I have heard a lot of suggestions that once the child starts working, the parents have the child put part of their income and then top it up so it is the max amount possible and the kid also learns too. I think this is great, and I wish that we had it when I was a kid. My Dad would have loved knowing about something like that. I think its also worth your son reading up on his benefits now, especially if he is getting stock options. Some of those are good and some of them are just a way to pay people less salary. My friend works for Costco and she got stock; I don't think she knew anything about it, but got lucky in her case. However, I have had friends who work for startups where they will offer any kind of "bonus" in order to pay a lower salary (free food! stock options!) And knowledge is power; he may not want to do anything about it, but when it comes to next year's bonus/raise conversation, he can be well prepared. That is also one thing I wish I knew about when I was younger; ask for a raise every year, and be ready to tell them why!
Very good points about the bonuses in exchange for lower pay and what he can use that information with! Since he's a new-grad and really not a lot of experience in the field, he's happy to have the experience, the opportunity to learn -- but I will mention it to him.
DeleteYour friend lucked out with the Costco stocks! Sometimes, these things just fall onto your lap and you don't even know what you have! Very cool!
Thanks for another Money Monday post!
ReplyDeleteHSA... I feel like we tried it and did not renew since we did not see much of a difference... We do not have big health expenses (knocks wood), and apart from a $10 co-pay for an office visit her and there, there hasn't been much. I have a public school state medical and dental insurance plan that has good coverage and low co-pays (10 primary, 15 specialist, no charge for emergency room, $5 generics). If we open the HSA back up, I guess we can squirrel away $$$ for something that is not covered by insurance which I am not sure what would count...I want to understand HSA but at this moment I don't see how I can make it worth it?...
Daria, I would say that it is twofold. Firstly, if you do have a high deductible, if something bad happens, like an accident or surgery, you would have to pay that amount out of pocket. So having a little "medical nest egg" is not a bad idea for an emergency. Plus it is all tax free. You don't get taxed on the way in or the way out if you use it for medical. This is basically like getting a 30% off, plus your total taxable income will be lower, which will keep you in a lower bracket potentially.
DeleteSecondly, and probably more important, will be your costs of healthcare later in life. I think the average cost of healthcare for a person over 65 is around $7,000, and some senior living or assisted living places can be $60,000+ per year! Even if you get medicare, you have to pay for some costs out of pocket.
Lastly! You can pay for all of your medical now out of pocket, and if you save the receipts, you could get reimbursement in 20 years if you want. Also, you can use it for non medical after age 65, or pass it on to your spouse or kids (or friends) if you don't use it. To me it is a no-lose situation.
I still count my donations, and though they are not enough to save me money on Federal taxes, I still save quite a bit on State taxes, so it depends on where you live.
ReplyDeleteI had a High Deductible Health Plan one year, and wouldn't you know it, it was the year that I came down with Rheumatoid Arthritis, so I spent a lot more than I saved that year. Since then, I've had 50/50 years, where sometimes I would have been better off with that plan, especially because my employer does contribute to the savings account, but other years I would have been screwed. Like last year, and the year before that. I think they're great if you're young and healthy, or maybe depending on your insurance. With my insurance, it wasn't great. HOWEVER, I absolutely encouraged my daughter to do it, as she IS young and healthy, and her employer contributes. I don't think she even kicks in anything (though I suggested she should, she is an adult and does what she wants), but still she comes out ahead because the premiums are lower AND she gets some in the account.
I had never thought of harvesting your stock. I have stock that I bought at $6 a share that is now $2 a share, and it never occurred to me to sell it, take the loss, and then buy it again. I guess the downside of that is that when I sell the improved stock, I am going to have to pay capital gains on it. On the other hand, it's not a lot of stock, so probably I would be under the limit so it wouldn't matter. Something to consider for sure, thank you!
J, you can sell the stock now for a loss and harvest that. When you buy it back, you can just pass the new stock onto your kid and they will get a step up in basis. Also I have sold stock that has a loss and I have NOT bought it back. Sometimes you just need to cut your losses and move on.
DeleteYou definitely have to assess whether or not a HDHP is for you. I think if you have a medical issue, you should probably pay more premium and less deductible for sure. However, as you mentioned, the young folks can take advantage (and should) while they can! Also if she has an HSA now, even if she stops contributing later, it will have lots of time to grow.
You are full of great information. I know a lot of this, but that doesn't mean I'm doing a great job of embracing that knowledge. My dad was an accountant, and he invested money and taught us stuff as we were growing up. I remember sitting at the dining room table as a 6th grader when he was trying to get me to understand taxes. We had to fill out our own income tax forms for him. Fast forward several decades and I was like DAD, TURBO TAX IS GREAT. Ha. While I was 'doing' my taxes, he made me learn the definition of cost basis. I was in tears by the time it was all said and done. *shudder* We have an investment account and have benefited from my grandparents' and my parents' generosity. My dad used to get upset that Coach and I didn't do more with our dividends (decide how to reinvest, etc.). I felt horrible for being so clueless and for Coach being uninvolved iwht this sort of thing, but then I decided HEY, WE HAVE AN INVESTMENT ACCOUNT AT A GREAT PLACE AND THE LADY THERE GIVES US GREAT ADVICE. Not everyone needs to know all the ins and outs of when to buy and sell. That's her job. She knows how we roll and what our goals are, so it works fine.
ReplyDeleteMy uncle, my dad's only sibling, passed away Feb. 1st. Each of my siblings and I were his beneficiaries. He intended to donate a set amount to several charities, but it turns out it wasn't set up properly in his estate, so the 5 of us agreed to donate the amount he wanted to the charities he named to fulfill his wish. It really was the least we could do, and none of us ever considered not doing it. The letters from the various organizations thanking us for following thru on his intentions were really touching. World Food Program USA sent me an email today, asking if we'd ever like to meet with them. Sure. Maybe one of our kids will learn something from the meeting and maybe they will embrace that charity as one that they want to support. Anyway, the cost basis being calculated from the date of Uncle's death was awesome. The charity donations we made will also offset our taxes.
Um, Coach had some money go to an HSA account this year, but never shared that with me. Thankfully it's rolling over to next year. It feels like found money.
Yes! The best part about an HSA is that it rolls over forever. It is YOUR money. However, don't confuse it with an FSA which I believe is a "use it or lose it" kind of thing.
DeleteYour Dad cracks me up. Parents have to try to impart wisdom to their kids, don't they? My Dad never taught me how to invest, but he definitely made me put my hard earned money in a savings account. Of course, I guess it stuck, because I am a saver. I think I only did my taxes on my own a couple of times before finding the joy that was Turbotax!
The situation with your uncle's money from a tax standpoint is better! You will now get to take the writeoff, which works out great. Also it sounds like despite your Dad annoying you, you do have a good grip on the term "cost basis!"