Overview of Tax-Advantaged Accounts

Table 8.1: Comparison of Tax-Advantaged Accounts, Limits for 2026
Account Account type Comments & Nuances Single Married
Health Savings Account (HSA) medical account; untaxed contributions + grows tax deferred + untaxed withdrawals. HDHP medical insurance. Any medical use. Flexible, but limited contributions. If 65+ years old, can withdraw money but must pay income taxes on it. Some states (CA, NJ) dont recognize HSAs, so you pay taxes on contributions, growth, and withdrawals. 4400 + 1000[age ≥ 55] ______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 8750 + 1000[age1 ≥ 55]+ 1000[age2 ≥ 55]
Flexible Spending Account (FSA) expense account; untaxed contributions + untaxed withdrawals; no investments medical insurance HDHP. Any medical use. Must decide how much to allocate in advance. Balances $680 are lost at years end. 3400 3400
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Limited-Purpose FSA __________________________________________________________________________________________________________________________________________________________ expense account; untaxed contributions + untaxed withdrawals; no investments __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ HDHP medical insurance. Dental & vision, medical after deductible met. Balances $680 are lost at years end. __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 3400______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 3400
Dependent Care FSA expense account; untaxed contributions + untaxed withdrawals; dependent care; no investments Restricted use. Must decide how much to allocate in advance. Balances are lost at years end. Pay expenses using pre-tax money. 7500 7500 (both must have income)
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Commuter transportation benefit __________________________________________________________________________________________________________________________________________________________ expense account; untaxed contributions + untaxed withdrawals; qualified transportation expenses; no investments __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Restricted use (E.g. public transport, parking near office). Must decide how much to allocate in advance. Balances are lost at years end. Pay expenses using pre-tax money. __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 4080 = 340 × 12 ______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 4080 = 340 × 12 each
Pre-tax 401(k) retirement account; untaxed contributions + grows tax-deferred + taxed withdrawals Must come directly from salary or bonus, not RSUs. Reduces your taxable income. If you have enough to allocate to a Roth 401(k), use that, not a pre-tax 401(k). Some taxes are extracted. Employer matching possible. This should rank lower than an HSA if your retirement income tax rate 13. Or, if you use a Roth 401(k), if your current income tax rate 13. 24500 + 8000 [age ≥ 50], or 12000[age ≥ 60] each 24500 + 8000[age ≥ 50] or 12000[age ≥ 60]
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ ABLE account for a disabled individual __________________________________________________________________________________________________________________________________________________________ expense account; taxed contributions + grows tax-deferred + untaxed withdrawals __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Only for individuals who became disabled when < 26 years old. Other restrictions apply. Anyone can contribute to anyones ABLE account. Pays for qualified expenses, e.g., housing, transportation, and basic living expenses. Money does not affect eligibility for SSI (if < $100K in account) and Medicaid. Thus, permits savings money for disabled individuals. Selection is quite limited. Plans can have non-trivial expenses. Contributions limits vary, e.g., $235K-$550K. Can rollover 529 contributions to ABLE account, e.g., learn person is disabled after starting saving in a 529 plan. Tax-free growth and distribution. Anyone can contribute up to gift tax amount ( $15K). If the disabled person is working, can contribute up to the poverty level ( $12K) plus free federal savers credit plus some states permit state-tax-free contributions. __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 19,000 + 15-18K if not enrolled in retirement account ______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ same for each
Deductible traditional IRA untaxed contributions + grows tax-deferred + taxed withdrawals Must open ones own IRA. Must contribute earned income. Low limits on maximal income for contribution. If you are able to allocate to a Roth IRA or an after-tax traditional IRA, directly allocate to those, not a deductible traditional IRA. As good as pre-tax 401(k) but no company match. Spouse can contribute directly from earned income. Otherwise, use a Spousal IRA. 7500 + 1100 [age ≥ 50] 7500 + 1100 [age ≥ 50].
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ After-tax 401(k) with in-plan Roth conversion (megabackdoor) __________________________________________________________________________________________________________________________________________________________ retirement account; taxed contributions + grows tax-deferred + untaxed withdrawals __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Must come directly from salary or bonus, not RSUs. Post-tax money so your contribution is taxed but is not taxed upon withdrawal if you register for automatic after-tax Roth conversions so that withdrawals will not be taxed. Crazy tax laws require the 2-step contribution and then conversion. Almost as good as an unmatched pre-tax 401(k) contribution but is slightly worse because of uncertainty about the future. If you know your retirement income tax rate (Tr) is higher than now (Tn), contributing post-tax money now is better. __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 35,250______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 35,250 (each)
Roth IRA retirement account; taxed contributions + grows tax-deferred + untaxed withdrawals Must open ones own IRA. Must contribute earned income. Contribution limits participation in a Roth IRA. If so, do the 2-step: contribute to an after-tax traditional IRA and then immediately convert to a Roth; crazy tax laws! (backdoor Roth IRA) Do not allocate to a deductible traditional IRA if you allocate money in this step. As good as after-tax 401(k), but can be slightly less convenient. Some may order this step higher than the after-tax 401(k), e.g., arguing about investment choices, required minimum distributions, legal protections, and ability to withdraw money early. 7500 + 1100 [age ≥ 50] 7500 + 1100 [age ≥ 50 each]
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Spousal Roth IRA or after-tax traditional IRA + Roth Conversion __________________________________________________________________________________________________________________________________________________________ retirement account; taxed contributions + grows tax-deferred + untaxed withdrawals __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ If your spouse is not working, they may create and fund an IRA from your income. Must open the IRA. Must contribute from spouses earned income. Contribution limits participation in a Roth IRA. If so, do the 2-step: contribute to an after-tax traditional IRA and then immediately convert to a Roth; crazy tax laws! Do not allocate to a deductible spousal traditional IRA if you allocate money in this step. Ties with the non-spousal Roth IRA. __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ n/a______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 7500 + 1100 [spouse age ≥ 50][spouses income is minimal]
529 plan (qualified tuition program) savings for education; taxed contributions + grows tax-deferred + tax-free withdrawals Withdrawals should be used for beneficiarys education expenses, typically college expenses. Some states will reduce state income tax or augment 529. If withdrawn for non-qualified purposes, pay 10% penalty on earnings only. If unused can be transferred to another beneficiary or Roth IRA (starting 2024). Read about restrictions before investing. As good as a Roth IRA except for limitations on its use. Some will argue that ones own retirement is more important than a childs education because there are other ways to fund the latter; this is probably true. 19,000 per beneficiary but can contribute 5 years worth (95,000) at once. More if willing to deal with gift tax. 38,000 per beneficiary but can contribute 5 years worth (190,000) at once. More if willing to deal with gift tax.
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ pre-tax 401(k) post-tax 401(k), including converting Employer match. Roth 401(k) is an optimization. __________________________________________________________________________________________________________________________________________________________ retirement account; taxed contributions + grows tax-deferred + untaxed withdrawals __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ Pay taxes now to convert pre-tax 401(k) contributions, which are taxed upon withdrawal, to post-tax contributions, which are not taxed upon withdrawal. Furthermore, withdrawals will not increase your taxable retirement income so your retirement income tax rate may be lower than otherwise. With one trick, you will not be forced to withdraw money ever, unlike for pre-tax 401(k)s. If you are able to allocate to a Roth 401(k) including catch-up, contribute directly to the Roth 401(k), not a pre-tax 401(k), avoiding the separate step of converting. Consider converting your pre-tax Employer match Conversions are not always a financial win. As good as Roth IRA or 529 except those options increase the investment in tax-deferred accounts and this does not. Depends on your federal + state income tax rate Tn. Pay taxes now at your current income tax rate to convert. __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 54,250 + 7500[age ≥ 50] (post-tax) ______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ 60,250 + 8500[age ≥ 50] (post-tax)
Series EE and I Savings Bonds unrestricted account; taxed contributions + grows tax deferred + taxed withdrawals U.S. government bonds with 30-year lifetimes. Only federally taxable, and tax-deferred until bond is redeemed. Tax-free if used for college for self or child (subject to low income limits). EE bonds earn fixed-rate interest. I bonds earn a lower, fixed-rate interest + inflation-adjusted interest. Must use Treasury Direct. Tax-deferred growth but only bond-level return. Default risk-free, but absolute return makes tax advantage savings minimal. Generally preferable over a savings account, MMA, CD or similar. 10,000 (EE) + 10,000 (I) + 5,000 (I from income tax refund) 20,000 (EE) + 20,000 (I) each + 10,000 (I from income tax refund)
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