A Newbie’s Guide to Tax-Friendly Savings Accounts
by Susannah McQuitty
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Okay, so here we are: We’ve learned some pretty sweet money saving habits, but we haven’t talked much about savings accounts yet.
What do you do with all that money you’ve stowed away?
While there are a lot of different savings accounts out there to choose from, these have some of the best tax benefits.
Ah, yes: that lovely 4-year journey into academia and adulthood.
529 plans are state-sponsored college savings accounts, and they can arm your wallet to prepare for your kid’s college expenses.
If you already have a little bundle of joy (or plan to have one soon), a 529 is a great way to earmark college savings and enjoy some tax advantages at the same time.
Contributions to a 529 aren’t tax-deductible, but any earnings from the account? Those are all yours, baby. Your earnings grow free of federal taxes and usually even state taxes!
Just make sure you’re using the money for qualified college expenses, and you’re good to go.
The ABLE act provides a disability-related expense savings account for people who become disabled before age 26.
Here’s some good news: Any money you earn from interest on an ABLE savings account is completely tax-free!
Plus, ABLE accounts are not considered means-tested benefits (benefits available when a person’s income and capital are below a specified limit), so they can be paired with a Supplemental Security Income (SSI) when the time comes.
Best of all, this savings account can also be used for your family’s expenses without penalty.
For Health and Medical
A health savings account (HSA) is available to those who participate in a high-deductible health plan (HDHP).
Basically, that means that if your health insurance plan doesn’t start paying your bills until you’ve paid a significant chunk of change yourself, you qualify for an HSA.
So what makes this kind of account so great?
Tax-deductible? Check. Tax-deferred on earnings? Check.
Best of all, HSA’s are tax-free when used to pay qualified medical expenses.
People, it’s never too early to start thinking about retirement.
401k’s, IRAs, and Roth IRAs are all retirement savings accounts with a lot of perks.
For 401k’s and traditional IRAs, you don’t have to pay taxes on your contributions or earnings until you take the money out to retire.
If you have a 401k, many employers will match a percentage of your contributions. That sounds pretty sweet.
With Roth IRAs, you pay taxes on your contributions now, so when you retire, you get everything you’ve saved—including earnings—tax-free.
So which plan is the best?
That depends on your preference and personal financial situation. Do a little digging: Your findings will be well worth the effort!
You might also be able to claim the Saver’s Credit, which means you can trim some dollars off your tax bill when you file your taxes.
Honestly, why wouldn’t you start saving now?
Newbie No More
And there you have it!
This list is by no means comprehensive of all savings accounts, but these have some of the best tax benefits.
Keep in mind, all savings options have special rules and qualifications – you’ll want to do a little more homework before you dive in.
One pro tip before we wrap up: When you file with 1040.com, you can actually deposit all or part of your refund directly into most savings accounts!
Investing in your future just got that much easier.
We’re well into July, so you’ve probably received your refund by now.
Maybe it was a pretty sweet sum—but are you really winning?
We’ll look at what getting a big refund means and why you might actually want to take a second glance at that W-4.
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