What Tax Breaks Can You Claim for Retirement Investing?

Tax-advantaged retirement accounts can save you a fortune on your IRS bill.

Saving money on taxes is a top priority for many Americans as it's never fun to send a lot of money to the IRS. The good news is, there are plenty of ways to reduce your tax bill -- including saving for your own retirement.

In fact, there are several tax deductions you can claim just for investing for your later years. You just need to know how to take advantage of them to reduce the amount you owe.

To help you figure that out, here are three accounts you can potentially invest in to save on your taxes while building your retirement nest egg.

1. A workplace 401(k)

You can invest in a 401(k) if your employer offers one. This account comes with an upfront tax break. You make contributions with pretax dollars, and your taxable income is reduced by the amount you invest. For example, if you make $50,000 in income and contribute $5,000 to your 401(k), the contribution would reduce your taxable income to $45,000.

In 2022, you can contribute up to $20,500 to your 401(k). If you're over 50, you can make an additional catch-up contribution of $6,500. This brings your total allowable contribution -- and total allowable tax deduction -- to $27,000.

Your employer may also match some of your contributions, which is free money for you -- but you can't claim any additional tax savings for funds your employer invests on your behalf.

2. A traditional or Roth IRA

Traditional IRA and Roth IRA accounts both provide tax savings, but you get to claim your savings at different times.

Traditional IRAs work like 401(k)s and provide an upfront tax break in the year you invest. Roth IRAs don't provide this type of tax savings -- you can't deduct contributions in the year you make them. But you can take tax-free withdrawals as a retiree, so you may prefer this option if you think your tax rate will be higher later in life. With both a traditional IRA and 401(k), you pay taxes at your ordinary rate when withdrawing money as a senior.

As long as your income isn't too high, you can make a combined contribution of $6,000 in a traditional and/or Roth IRA in 2022. If you're 50 or older, you can make an additional $1,000 catch-up contribution. You can open these accounts with a brokerage firm of your choosing, regardless of whether you have a workplace retirement plan or not.

3. A health savings account

A health savings account (HSA) tends to provide the most generous tax breaks of any type of investment account. And while not technically a retirement savings account, an HSA can be treated as one since you can put money into it each year, invest it, and leave it in your account to grow.

Later in life, you can use an HSA to cover some of the substantial healthcare costs you might incur. You also have the option to withdraw money for any reason without penalty after you turn 65. That means you can use the money for other retirement-related expenses.

When you contribute to an HSA, you get to deduct the amount you invested in the year of your contribution. If you're taking money out for qualifying health expenses as a retiree, you also get to take tax-free withdrawals.

While a 401(k), traditional, or Roth IRA will offer either an upfront or deferred tax break, an HSA offers both if you're using the account to pay for medical services. If you make a withdrawal for other reasons after 65, however, you'll be taxed at your ordinary rate just like you would with a 401(k) or traditional IRA. So you'd get the same tax breaks as with these two accounts, rather than the double tax benefit that comes from using it for medical care.

You do need to have a qualifying high-deductible health plan to invest in an HSA, though. And the contribution limits are lower -- $3,650 if you have a single plan and $7,300 for family coverage in 2022.

As you can see, investing in any or all of these accounts could provide you with some nice tax savings. Look into which option is best for you, or consider contributing to multiple account types to save as much as possible on your IRS bill.