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The government gives us all tax benefits for certain activities they want to incentivize saving for: retirement, education, healthcare. Learning how to use these accounts intelligently can save you a meaningful amount in taxes every single year.
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Table of Contents
How Tax Advantaged Accounts Work
The government gives special tax benefits for activities they want to incentivize, things like:
- Retirement
- Education
- Healthcare
Taking advantage of these accounts is a great way to be smart about saving money on taxes.
Here’s an overview of the major tax-advantaged accounts:
| Category |
Common Accounts |
Less Used Accounts |
| Retirement |
401k, IRA, Solo 401k, SEP IRA |
Thrift Savings Plan, Cash Balance Plan, 457(b), 403(b) |
| Healthcare |
HSA, FSA |
Archer MSA, ABLE Accounts |
| Education |
529 |
Coverdell ESA |
Common Tax Benefits of Tax-Advantaged Accounts
Most tax-advantaged accounts have one or all of these tax benefits:
- Tax deductions: Anything you contribute to an account reduces your taxable income for the tax year.
- Tax-free compounding: Most tax-advantaged accounts allow you to compound tax-free. If you buy and sell assets for a profit, you don't have to pay taxes until you withdraw. With a regular investment account, you have to pay capital gains tax whenever you sell assets for a profit. For example, if you invested $10,000 into Tesla stock and it grew to $100,000, you would owe capital gains tax on the $90,000 in profit. With a retirement account, profits go straight back into your account and it can all be reinvested, allowing your retirement nest egg to grow significantly faster and larger.
- Tax-free withdrawals: Roth retirement account contributions are made with after-tax income, but withdrawals in retirement are tax-free, no matter how large your gains. With Roth accounts, you have tax-free compounding and then tax-free withdrawals in retirement.