Lower Your Tax Bill for Life

With tax day just around the corner, you’re likely to run into a bevy on helpful online articles on how to reduce your tax bill before you file.

Helpful stuff but, mostly, either small-ball recommendations or deductions so obscure as to be useless to most. Solar panels? Estate planning? Great, you might respond, but what about me, the ordinary middle-income taxpayer?

Have no fear, this is not another one of those less-then-applicable tax break lists. Instead, here are the five most important permanent changes you can make that will lower your taxes this year and every year, and even into retirement.

Ready to cut your taxes? Here we go:

1. Join your company 401(k)

This is a big deal. You pay far too much in both state and federal taxes if you don’t open and fund a 401(k) as soon as you can. The money you put into a 401(k) comes out of your pay pre-tax. It grows tax-deferred in your name, compounding over decades. It’s a no-miss proposition, tax-wise, and your company is likely to partially match your contribution.

2. Open a spousal IRA

Obviously, matching 401(k)s for you and a spouse would maximize your tax break, but if one of you is at home (working, clearly, but unpaid) then the best way to save more on taxes is to open and fund a spousal IRA. The breadwinner can contribute to a spouse’s retirement account, lowering your total taxes in the process.

3. Start putting money into a Roth IRA

Few people realize that it is likely that they will pay taxes in retirement. There are the typical real estate taxes and capital gains and dividend taxes on investments outside qualified plans but also taxes on your Social Security benefits, both federal taxes and in many cases state taxes too. Income is income in the eyes of the tax collector.

You can lower that retirement tax bill easily enough by putting money into a Roth IRA today. You don’t get a tax break now but withdrawals later are tax-free and your account grows tax-free in the meantime.

4. Save into a 529 plan, if you have kids

Think of a 529 plan as an education IRA. States run them and, while the tax breaks vary by state, the savings are real. If you have kids preparing for college, using a 529 consistently will lower your total tax bill each and every year.

5. Open a health savings account (HSA) or use a workplace FSA

Finally, you can stash away even more, year after year, by opening a health savings account, or HSA. These work in conjunction with high-deductible health plans. Used correctly, they allow you access to quality care at a lower premium cost and a chance to defer thousands of dollars into an account that you can use for health spending now or in retirement. If you don’t use a high-deductible plan, look into your company’s flexible spending account, or FSA.

The key to long-term tax reduction is to be consistent and save. Whether you save into workplace plans, IRAs or health and education accounts is a matter of your personal goals. Yet every dollar you stick in that rainy day fund can be a tax-deferred or tax-free dollar in time, if you play the game right.