Boost Your Savings with Government Help


We live in a country that offers many benefits to individuals that aggressively save for retirement. Unfortunately, more often than not, people decide to continue consuming rather than take advantage of the help our government offers to everyone freely. A recent study by Fidelity shows that the average savings rate of Americans, is a mere 8.7%. (PDF Link) I want to show you just how much the Government is willing to give you, just to encourage you to save more for retirement. This year, I realized that I was losing over $4,000 per year in taxes that I was paying simply because I didn’t realize how much the Government was ready to help me save.

My wife and I live well below my salary income, and she stays at home to take care of our son. Tax advantaged accounts are akin to adding turbo fuel to your retirement vehicle. There are three kinds that are available to me, and I wanted to show the total amount of money that the government was giving me (via tax deductions) to contribute to them.

Health Savings Accounts ($1,030 saved in taxes)

As I discussed in my earlier article on the secret king of retirement accounts, the tax advantages of an HSA are massive. My wife and I had been contributing $2,000 per year to our account, and changed this to the IRS maximum this year. Since my employer puts $1,250 into the account for me each year, I only need to $5,500 to max out the account. This means that I am not paying taxes (including FICA) on $5,500 for a total savings of $1,030 / yr or (18.74% in my tax situation). To put it another way, the government funds nearly 20% of my HSA and I really only have to put $4,470 after-tax dollars into the account to max it!

401k ($1,996 saved in taxes)

My wife and I realized that saving pre-tax is ALWAYS better, even if we have to pay the 10% penalty to withdraw the money early. MadFientist has a great article explaining this. Due to this realization we starting maxing out my 401k at work ($18,000 / yr.). This money never has to pay state or federal taxes. As such, I get to keep 11.09% of that money or $1,996 per year. Again, it’s as if the government gave me an 11% boost to my contributions to the 401k. Keep in mind that if your employer provides you with matching on your 401k, the employer matching does not count against the overall $18,000 IRS contribution limit.

Traditional IRA’s ($1,219 saved in taxes)

Finally, due to the Mad Fientist article mentioned above, my wife and I began to fill out Traditional IRA’s for each of us. The IRS limits contributions to personal IRA’s at $5,500 each or $11,000 for both of us. We also max these accounts for a total tax savings of $1,219 per year, another 11% government boost.

Other Bonuses ($400 saved in taxes)

Due to all of this pre-tax savings I can get my families Adjusted Gross Income (AGI) down to a level where we qualify for the Retirement Savers Credit (IRS Link)! For us, this credit is an additional $400 the federal government won’t charge us, just for saving money.

Granted, getting to this level of savings for my family has been challenging. We currently save over 70% of my income (and are a single income household with a kid). All in all, we live a very comfortable life on less than $24,000 in spending per year (excluding mortgage payments). By re-arranging our savings as listed above, we are able to save $4,645 more than if we had decided to keep the money and spend it ourselves, or save it in taxable accounts.

Since my goal is to be financially independent in eight years from the time of this writing, this series of decisions will save us over $45,757 in net worth during that time period with an estimated $8,597 in interest (assuming 8% returns in the market).

What do you think? What other tax laws, aside from pre-tax retirement accounts do you use to boost your savings?

1 Comment

  1. Trevor

    I didn’t realize the government offered so many tax incentives for retirement savings!

    I use depreciation as my tax-advantaged retirement vehicle. When I buy a rental property, I am allowed to depreciate the value of the dwelling against my taxable income. If I don’t sell the rental property, I’ll never have to pay income tax on the value of the dwelling! For each $150K house I buy, it means I can earn an additional lifetime income of about $120K income tax free!

    If I do sell the dwelling, I’ll have to pay tax on the portion of the dwelling I depreciated up to the point of sale… UNLESS I use the money to purchase another house through a 1031 exchange. In that case, I transfer my depreciation basis to the new house and still avoid income tax.


Leave a Comment

Your email address will not be published. Required fields are marked *