When you earn income through wages, you are not getting 100% of what you earned. Instead, a portion will go to uncle Sam. Depending on your tax bracket, that portion can go up to 37% for federal income tax. So how to minimize tax is strategic and critical to maximize your income. Today, I’m focusing around three ways to help sheld from tax. They are 401k or IRA, HSA and 529 college funds.
Let’s start with 401k or sometimes IRA, depending on the size of the company you are working for. 401k is a portion of pre-tax contribution from your salary. This money can then be invested in fixed income or equity funds, which would grow over time as you keep contributing month after month. There’s one catch. It’s eligible to be withdrawn when you reach the age of fifty-nine and half. If you need to withdraw earlier, there will be tax penalty. The benefit of 401k is that employers normally match the entire amount or a portion of your contribution. This is free money, so you shouldn’t give up. Be careful, 401k has a cap. In 2024, that cap is $23,000 per person. After that amount, the contribution becomes after-tax.
Next, HSA, or Health Savings Account. We all know that health care is becoming more and more costly in the United States. If you ever visited emergency room, you get a bill of minimum $1000 if you have high-deductible plan! So saving money for medical bills while you are young and healthy is a wise idea. Many companies offer health benefit options. Look for the high deductible health plan (HDHP), which allows you to contribute a portion of your pre-tax salary to HSA. There’s also a cap to HSA contribution. In 2024, the cap for family coverage is $8,300 and $4,150 for individual. The beauty of HSA is most companies also contribute a portion towards your HSA when you enroll in HDHP. That portion can go up to over $2,000 a year. Do take advantage of that.
Now let’s talk about some tax-shield for after-tax income. Here I’m just going to focus on education funds. 529 college funds are pretty common in the United States. You can start contributing to a 529 fund as early as when your child or grandchild is born. The funds normally have many investment options, including fixed income and equity funds. Although you are using after-tax income to contribute, the growth of the investments are tax-free as long as you use the money towards higher education. Over time, the investment compound growth can be quite sizable.
