It is that time of year to look back and reflect on how much money I saved (and earned) from my tax advantaged accounts. This year, I tried taking things to the next level with tax optimization. There are many things I am sure I can still optimize, but let’s take a look at what I took advantage of this year.
Before I go too much into detail, let me make my disclaimer here. I am by no means a tax professional and this is not tax advice. Phew. Now let’s jump in.
First Year Maxing Out 401k!
This was the first ever year I was able to max out my 401k! This was a huge accomplishment that I wish I would have done earlier in my professional career. Here are some of the benefits of maxing out my 401k:
- My Adjusted Gross Income (AGI) decreased by $19,000. This is especially important when it comes to saving money on taxes!
- The reduction in AGI by $19,000 will save me $6,080 in taxes!
- My company matched $12,750! That is free cash in the bank! If you have a company match, don’t let it go to waste
- The market did great this year and my 401k returned 25%
My strategy next year will be the same as the strategy from this year. I plan to contribute the largest amount I can on every paycheck at the beginning of the year till I hit $19,000. For me, I should be able to hit the $19,000 by my bonus paycheck. There are a few reasons I “frontload” my 401k.
First, front loading allows me to be even more frugal the first few months of the year. I love auto investing and not seeing the money hit my account. Second, my company will still finish their match no matter when I hit the max contribution. This is an important point with this strategy. Make sure your company will continue your match if you max out your 401k early. Most will, but check before you implement this strategy. Finally, once I hit the max contribution, my paycheck skyrockets! Think about it, if you are contributing 50% of your paycheck to your 401k. Once you hit the max contribution, your paycheck will begin looking nice and juicy!
First Year Having A Health Savings Account
The next of the firsts was switching over to a Health Savings Account. There are many articles detailing out why some think this is the most tax advantaged account. The high level overview for why HSA’s are so impactful are:
- No income limitations to contribute for tax exemptions
- Growth in the account is tax free!
- Money in your account can be used for qualifying medical expenses at a later date. It isn’t a ‘Use it or lose it’ type account. The money will always rollover to future years if not spent.
Now let’s look at my HSA performance since investing in it!
- My total contributions were $3,150 while my employer contributed $350 to max out the account! Again, free money! Don’t miss out on the free money from your employer if it is available.
- My current value of the account is $3,969! The accounts investment has returned 21.5% this year. My HSA is currently allocated 100% to VIGIX (Vanguard Growth Index Institutional). I invested in this index fund because of its low expense ratio and because I like Vanguard!
- Investing $3,500 will reduce my AGI and save me $1,120 in taxes!
There are a lot of factors you should consider before investing in a HSA account. Please make sure to do your research to ensure it is the right plan for you before switching!
Tax Loss Harvesting
Tax loss harvesting is another great thing to look into before the years end! Lucky for you, I wrote a very detailed article on how I did this last year. To read the full article, click this link.
I won’t begin to think I am an expert in all the tax advantages of owning real estate, but I will share what I believe to be true.
- Real estate taxes on both my properties should be deductible!
- Deducting my operating costs for my Airbnb! This will include my cleaning costs, utilities, pool maintenance and the maintenance costs!
- Another cool thing, I should be able to deduct my Netflix and Prime Video subscriptions. Will double check to make sure, but that is why I am paying a tax professional this year to do my taxes!
I am sure I am missing a few other things, so I will share more on this once I am able to sit down with my CPA to review.
Last But Not Least, The Backdoor ROTH
Let me start by explaining why a Backdoor ROTH. The ROTH has certain income limits where you can no longer contribute to it. The income limit for 2019 is $122,000 for someone filing single and $193,000 for someone filing jointly. I have been fortunate enough to exceed the income limit this past year where I now have to perform a Backdoor ROTH.
The Backdoor ROTH is a loophole for high income earners to take advantage of this type of account. I will contribute to a Traditional IRA account and then convert that account to a ROTH IRA after the money is in. This task is pretty straightforward with Vanguard. After depositing the money, I called Vanguard and a representative on the phone did the conversion for me. This took about 5 minutes!
It has been a crazy year to say the least. I have tried taking a lot of action in many different areas of my life. Taxes definitely are one of the areas I have tried to optimize. All in all, these tax optimizations have added up to over $27,000 savings and growth! I hope you were able to learn a little bit from this post!
- Don’t lose out on free money from your employer! My employer gave me $13,100 in free money this year!
- Understand what tax advantaged accounts and things you should be looking to do. There are many different ways to optimize how much you are paying in taxes. Figure out what applies to you.
- Never stop learning and hire out to a CPA! Like I mentioned in the real estate part of this post. I don’t know everything and want to ensure I am taking advantage of everything I can. This is the main reason I hired out a CPA to help ensure I do everything right this year!
2 thoughts on “End of Year Tax Optimization – How I Saved An Additional $27,000 This Year From Tax Optimization”
Goal is to do most of all of that in 2020 for me. I could only contribute 10k in 401k this year. I signed up for FSA because you have to choose the high deductible medical premiums on HSA. I can’t invest it like your doing through HSA though.
Great post, thanks for breaking this down.
That is awesome! Let me know how it goes.