In order to be successful, it's not enough just to save. You also have to know how to put the money you save to best use. That means knowing about some of the ways that the IRS offers tax benefits to those who take advantage of certain types of accounts, and using them to the fullest extent possible.
In particular, there are two tax breaks that the IRS offers every year, and most taxpayers can use one or both of them. But to use them, you have to act quickly, because the deadline for adding money to these accounts for the 2017 tax year is approaching fast. Below, we'll look at these two different tax breaks -- IRAs and health savings accounts -- and whether you can benefit from using one or both of them in your financial planning.
Get money into an IRA
If you've made money from a regular job, a side gig, or your own business, then you're allowed to save money in an IRA. The limit for the 2017 tax year is $5,500 if you're younger than 50 or $6,500 if you're 50 or older, as long as you've earned at least that much during the year. The deadline for making contributions for 2017 is the tax filing deadline of April 17, 2018. Even if you get an extension to file your taxes, you can't get extra time to open an IRA.
Investors can choose between two different types of IRAs: Roth or traditional. A traditional IRA offers an upfront tax deduction that you can take on your 2017 tax return, saving you in taxes right now. A Roth IRA doesn't offer a deduction, but it does produce tax-free income even when you take withdrawals in retirement. Various income limits determine whether you can make a contribution to a Roth IRA at all, as well as whether you can deduct the contributions you make to a traditional IRA. Nevertheless, there's always at least some type of IRA that's available for you to use to save for retirement.
Can an HSA help you?
Health savings accounts are special savings vehicles intended for use in paying healthcare expenses. If you have coverage under a high-deductible health plan, then HSAs let you set aside money that you can later use toward qualifying care. Covered costs include not only doctor visits, prescription drugs, and medical procedures, but also the co-payments that you have to make with regular health insurance.
Not all health insurance counts as high-deductible. Your policy has to have minimum deductibles of $1,300 for single coverage or $2,600 for family coverage in order to qualify as an HDHP, and if it doesn't, then you can't make an HSA contribution.
If your insurance does qualify, then you can contribute up to $3,400 for self-only coverage or $6,750 for family coverage for the 2017 tax year. The contributions are tax-deductible on your 2017 return, and the money comes out on a tax-free basis as long as you use it to pay covered medical expenses. But to take advantage of favorable tax treatment for HSA contributions for 2017, you have to get money into your account by the April 17 tax filing deadline.
With just hours before the end of tax season, it's coming down to crunch time for those hoping to take advantage of these two tax breaks. But it's not too late. If you act fast, then you can just make it and potentially come up with thousands of dollars of last-minute tax savings.