Tax season can be a stressful time for many people. The thought of preparing and filing taxes can be daunting, but it’s also a great opportunity to review your financial situation and make some smart investment decisions. By investing in the right assets, professionals like Kavan Choksi say you can not only reduce your tax bill but also increase your wealth in the long run. In this article, we’ll discuss some smart investments to make during tax season that can help you maximize your returns.
Maximizing Your Tax-Deferred Retirement Accounts
One of the best investments to make during tax season is to contribute to your tax-deferred retirement accounts. For example, if you have a 401(k) plan, you can make contributions up to $19,500 if you are under 50 years old and up to $26,000 if you are 50 years old or older. By contributing to your 401(k), you can reduce your taxable income, which means you will owe less in taxes. Plus, your contributions will grow tax-free until you withdraw them in retirement, which is a great way to build wealth over the long term.
If you don’t have access to a 401(k) plan, you can also contribute to a traditional IRA. For 2022, the contribution limit for traditional IRAs is $6,000 for those under 50 years old and $7,000 for those 50 years old or older. The contribution to a traditional IRA is also tax-deductible, which can help you lower your tax bill.
Investing in Health Savings Accounts (HSAs)
Another smart investment to make during tax season is to invest in a Health Savings Account (HSA). An HSA is a tax-advantaged savings account that you can use to pay for qualified medical expenses. Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free.
An HSA is a great way to save for healthcare expenses in retirement. If you’re not using your HSA to pay for current medical expenses, you can invest the funds in stocks, bonds, or other assets. Over time, the funds in your HSA can grow and compound tax-free. When you reach retirement, you can use your HSA to pay for qualified medical expenses tax-free.
Investing in Tax-Advantaged College Savings Accounts
If you have children, another smart investment to make during tax season is to invest in a tax-advantaged college savings account, such as a 529 plan. A 529 plan is a tax-advantaged savings plan designed to help families save for college. Contributions to a 529 plan are not tax-deductible, but the earnings in the plan grow tax-free, and withdrawals for qualified education expenses are also tax-free.
Investing in a 529 plan can help you save for your children’s education while reducing your tax bill. Some states offer tax deductions or credits for contributions to a 529 plan, which can further reduce your tax bill.
Investing in Municipal Bonds
Investing in municipal bonds is another smart investment to make during tax season. Municipal bonds are debt securities issued by state and local governments to fund public projects, such as schools, highways, and hospitals. The interest on municipal bonds is typically exempt from federal income tax and sometimes state and local taxes as well.
Investing in municipal bonds can help you reduce your tax bill while generating a steady stream of income. Municipal bonds are generally considered to be lower risk than stocks, making them a good choice for investors who want to minimize risk.