Steps you can take to save on taxes:
- Max out contributions to tax-advantaged accounts: 401k, HSA, IRA
- If you have self-employed income, consider a SEP IRA or Solo 401k
- If you're saving for education, use a 529
- If you're choosing a new place to live, consider your state's income and property tax
- If you're planning on a long sabbatical, consider doing a 401k to Roth IRA rollover
In More Details
Common Tax Advantaged Accounts: 401k, HSA, IRA — the easiest way to save money on taxes is to max out your contributions to these three accounts. For a traditional 401k, you'll be able to invest pre-tax money. For an HSA, you'll also be able to withdraw tax-free on qualifying medical expenses. For backdoor Roth IRAs, your contributions will be taxed but your earnings will be tax-free.
Self-Employed Income: SEP IRA or Solo 401k — if you're self-employed (or you have a side project earning income), consider opening up a Simplified Employee Pension IRA or a Solo 401k. These retirement plans are available for self-employed individuals. They can also exist alongside your regular 401k and Roth IRA.
Saving for Education: 529 — the 529 plan is another tax-advantaged savings plan specifically for college savings. If you're saving college tuition for someone, a 529 will allow you to have tax-free earnings and withdrawals.
State Income and Property Taxes — if you're deciding between residing in two or more states, take their income and property taxes into account. While these rates shouldn't be your primary motivation, it can be a deciding factor. If you work remotely, your state income tax will be your state of residence.
401k to Roth IRA rollover — taking a long break? If your annual salary will be significantly reduced, it's the perfect time to perform a traditional 401k to Roth IRA rollover. Since Roth rollovers are a taxable event, a conversion tends to add a huge amount to your taxable income. If you're already making a high income, your rollover will be taxed at the highest tax brackets. But if you're taking a sabbatical, your rollover could be taxed at the lower brackets.
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Budget Expenses Save on the big expenses and keep track of your net worth
Save on Housing Buying vs Renting and the importance of avoiding lifestyle inflation
Save on Transportation Used cars and alternative methods of transportation
Save on Food Budget groceries, meal prepping, and less eating out
Calculate Your Savings Rate The most important number to early financial independence
Max Out Your 401k Take advantage of employer match and tax savings
Max Out Your HSA Invest money in a pre-tax (and post-tax!) free account
Max Out Your Roth IRA Save additional money in an IRA (via a backdoor)
Optimize Sabbaticals Taking a long break? Roll over your 401k