With tax day right here, you have dwindling time to get an extra tax deduction while also saving more for your retirement.
After-tax contributions to a health savings account (HSA) or a traditional individual retirement account (IRA) before this year’s April 18 tax deadline can help reduce your taxable income for your 2022 federal taxes — given you haven’t filed already.
The second upshot is that those contributions help to secure your financial future after you retire.
“People should save as much as they can, for as long as they can, in as many ways that they are able,” Heather Winston, product director for retirement income solutions at Principal, told Yahoo Finance.
HSA contribution eligibility and limits
HSAs are a hidden gem full of tax-advantaged benefits for workers enrolled in a high-deductible health care plan.
First, after-tax personal HSA contributions are tax deductible on your federal tax return. You also don’t have to itemize to get the deduction.
Second, using your HSA money to cover qualified medical expenses is tax free. Last, if you invest your HSA money, any growth is also tax-free.
The maximum contribution individuals can make to their HSA for the 2022 tax year is $3,650, and those contributions can be made up until the tax deadline to count. For families, the max is $7,300. These limits are higher for the 2023 tax year.
HSA holders who are 50 and older can contribute an extra $1000 under a “catch-up” provision.
“You don’t have to be enrolled in the plan for the full year, but if you haven’t been enrolled for the entirety of 2022, the amount you can contribute will be prorated,” Winston said. “This provision is especially helpful for anyone who changed employment status mid-year and didn’t elect a new health care plan.”
However, there is a key exception to this rule that could have serious tax implications.
“You can contribute the maximum you are eligible to, for the entire year, with one catch – you have to stay enrolled in the plan for a one-year ‘testing period’ from December 1 of the year you contribute to December 31 of the following year,” Winston said. “This type of exception is important to be familiar with or the IRS will come calling for excess contributions and those will be subject to taxes and penalties.”
Winston recommends that people check with a tax expert to determine their full eligibility.
“The Form 8889 is used to determine your HSA deduction, report contributions to (and distributions from) your HSA, among other details,” Winston said.
IRA contribution eligibility and limits
A long-established retirement tool, traditional IRAs also come with certain tax benefits. Contributions made to these accounts can be fully or partially deductible. You can deduct contributions for the 2022 tax year as long as you make those contributions by tax day.
Winston explained more about IRA contribution tax deductions.
“Deductibility of traditional IRA contributions is dependent on whether you or your spouse is not covered by a retirement plan at work. If you are single and not covered by a retirement plan at work, then your deduction is allowed in full,” Winston said. “This changes if you or your spouse is covered by a retirement plan at work and your income exceeds certain amounts.”
The maximum individual contribution to IRAs for the 2022 tax year is $6,000. If a worker is 50 or older, the limit is $7,000. Winston noted you must have earned income to make a contribution.
Of course, time is of the essence for the 2022 tax year. Workers can reach out to their employers or retirement plan provider to find out more. Many times, these contributions can be done quickly and electronically.
But if you miss out this year, there's always next year.
“It’s never too late to make IRA and HSA contributions,” Winston said.
Ella Vincent is the personal finance reporter for Yahoo Finance. Follow her on Twitter @bookgirlchicago.