Each year, you have the opportunity to earn valuable tax savings by investing for your future. But if you don't take advantage of that chance, you'll miss out on the assistance Uncle Sam provides, and won't ever have the opportunity to score that year's tax savings again.
With 2020 already more than half over, hopefully you're more than half way toward earning your tax savings in a few important accounts.
How close are you to maxing out your tax savings?
Accounts that provide you with tax savings include:
- A 401(k), which has a maximum contribution limit of $19,500 (or $26,000 if you're 50 or over and eligible for catch-up contributions). You can contribute only if your employer offers one, or if you're eligible for a Solo 401(k). Your employer contributions, if offered, don't count toward your $19,500 limit.
- A traditional or Roth IRA, which have a combined maximum contribution limit of $6,000 (or $7,000 if you're 50 or over). You must be below the income limits to be eligible to contribute to a Roth, or to make deductible contributions to a traditional IRA if either you or your spouse have a workplace retirement plan.
- A health savings account, which you can contribute to only if you have high-deductible health insurance coverage, and which has an annual contribution limit of $3,550 if you have individual coverage or $7,100 if you have family coverage. You can also make an additional $1,000 catch-up contribution if you're 55 or over.
If you're eligible for these accounts, maxing them out would allow you to build the financial security you need for your future. And while you have until tax day to make your contributions for the year, contributing the maximum every year is often easier if you get your money in by December 31 so you can start working on next year's contributions at the start of each new year.
Of course, most people can't max out even one of these accounts every year, much less all of them. And if you can't, you may prefer to mix up which ones you contribute to -- say, by putting some of your money into a 401(k), and then contributing to a HSA or Roth IRA to get the different benefits each account provides.
The important thing is to set your goals for how much you'll contribute to each account early in the year, and work on achieving those objectives throughout the year -- even if you can't max out each and every one. If that's the case and your hope was to contribute $10,000 to your 401(k) this year, ideally you'll be more than half way to achieving that objective, as it's easier for most people to invest some money each month rather than making a big lump-sum contribution at year's end.
By including a contribution in your monthly budget and automating the transfer of your funds to each account, you'll get used to living without that cash and maximize the chances of scoring all the tax savings you can.
What if you're not half way to maxing out your tax advantaged contributions?
If you aren't half way toward maxing out these accounts -- or hitting your goals for contributions for the year -- there's still time.
Look for cuts to your budget or opportunities to earn extra income that you can invest. And make a plan now for next year so you can start saving in January and put aside enough each month that by the time September 2021 rolls around, you've got three quarters of your contributions made, and you can just finish off the year strong.