Act now to reduce your 2023 taxes - Marc Chamberlin, FA

If you’ve finished your 2022 tax returns, probably the last thing you want to think about is taxes, but taking some wise actions now could save you income taxes and build your wealth.  If you didn’t take full advantage of these powerful strategies in 2022, let’s meet to explore implementing them as part of your financial plan.

Max Your Retirement Plans

According to the Department of Labor, only 51% of workers contributed to their employer-sponsored retirement plans in 2021.  Only 14% took full advantage of this powerful tax and investing tool by maxing out their contributions.  Only 14%!  In 2023, employees can contribute up to $22,500 to a 401(k) and $6,500 to an IRA.  Limits for workers over 50 are even higher: $30,000 for a 401(k) and $7,500 for an IRA. Households with combined finances should consider maxing out contributions to both retirement plans.

Health Savings Account (HSA)

A health savings account might seem unappealing with a relatively low contribution limit, but those accounts have triple-tax benefits.  Contributions go into an HSA pre-tax, earnings are tax-deferred, and qualified withdrawals come out tax-free.  HSAs allow you to set aside money for health-care costs, like doctors appointments and medications. The HSA contribution limit in 2023 is $3,850 for individuals and $7,750 for family coverage.

529 Education Savings Plans 

For more than twenty years, earnings in these college savings plans have been exempted from federal taxation.  Since 2007, Indiana taxpayers have also been eligible to receive a state income tax credit for contributions to a 529 plan.  Indiana taxpayers can receive an annual state income tax credit of 20 percent of contributions to their CollegeChoice 529 accounts, worth up to $1,000 each year ($500 for married couples filing separately). Beginning in 2024, the maximum Indiana tax credit increases by 50 percent, from $1,000 to $1,500, for contributions made in 2023; the first time this tax credit has increased since it went into effect in 2007.

“Backdoor” Roth IRA

A “backdoor” IRA is a strategy used by high-earners whose income exceeds the limit to contribute directly to a Roth IRA. Instead, they convert a traditional IRA to a Roth IRA, which means paying tax on the conversion but then afterwards getting to take qualified withdrawals tax-free and without required minimum distributions.  This is a more complex tax strategy that should be fully explored with your tax advisor prior to implementing.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover education costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.