By the end of January, many people should have received their W-2’s and other income documents. You may think that the prior tax year is pretty much over and all that’s left is to tally up all the numbers then figure out the best ways to maximize deductions in order to lower the total taxes then file your taxes, but there are still ways to go back in time and adjust last year’s totals without the complications of searching for various deductions, many of which no longer apply after December 31st.
Individual Retirement Account (IRA) contributions can be made toward last year’s contribution limit. This action reduces your taxable income by the amount contributed. You won’t be able to withdraw IRA money until retirement unless you pay income taxes and a penalty, but that’s the point of an IRA.
Health Savings Accounts (HSA) work similarly to IRAs but the money is designated for health related expenses (even buying over the counter aspirin). The only way to get an HSA is through a high deductible health care plan, which many employers now offer alongside standard HMO and PPO plans. HSAs are arguably superior to IRAs, but this benefit is offset by lower contribution limits.
Roth IRAs are a type of IRA where instead of saving on taxes this year, you pay taxes now and never have to pay taxes on capital gains from investing it. This reduces future taxes. One annual contribution limit applies to the combined total of IRA and Roth IRA contributions, so you are given the choice of when to pay these taxes – this year or in the future. One strategy for some people who are on the border between tax brackets is to first max out to the HSA contribution limit, then contribute to the IRA until you cross the threshold to the lower tax bracket, and put the rest into a Roth IRA.
What I like about these tax tricks is that unlike deductions from things like charitable giving, there is no need to spend money to save on taxes. Money invested in an IRA or HSA is still your money, and better yet, it is able to grow under better tax conditions. This is one way to earn the same income and investment returns as others, but still beat them at after tax basis.