How to Invest While Reducing Your Tax Liability in 2024 

Investing for the future comes with several benefits, but one sometimes overlooked benefit is reducing your tax liability. By investing for the future in tax-advantaged retirement accounts, you can potentially reduce your overall tax bill. This works by leveraging your current dollars to structure long-term wins. 

With that said, taxes can become complex. Use this as a guide for a better understanding of your own goals and how to position yourself. Then, I’d recommend that you seek a licensed tax professional who understands financial planning. The wealthy don’t merely do their taxes by April, they plan ahead in November of the prior year.

Here are five ways to potentially reduce your tax liability through investing in 2024.

1. Invest in an employer-sponsored retirement plan ie. 401k, 403b, or 457b

Putting money away directly from your paycheck is a great way to get started on your investing journey. The added benefit comes in terms of tax avoidance or tax liability reduction.  

The more familiar employer-sponsored retirement accounts include the 401k, and 403b (retirement plan for public school and non-profit employees). Self-employed and employees of small businesses are likely to run into solo 401ks or SIMPLE Individual Retirement Account (IRA).

Government employees and not-for-profit organization employees are likely more familiar with the 457b. While those working in the federal government, including military service, have access to the Thrift Savings Plan (TSP). 

Benefits but What’s the catch?

With any of these account vehicles, you have the ability to invest pre-tax dollars for your retirement. By contributing these dollars now, you could reduce your taxable income for the year. For example, if you earn a gross income of $100,000 and invested $22,500 in 2023, your W2 will show $77,500 with a note for the 401k. Instant tax benefit.

So what’s the catch? When you start taking distributions, you will pay income tax on those funds at that time.

But don’t worry, your taxes will be leveraged on the amount that you take out at any given time. If you structure your withdrawals correctly, this should work in your favor. The most important thing is that you allow your investment to grow with time.

Even an average employee matching contribution of $3,000/yr (invested at 8 percent) is worth $805,270 (at year 40). That’s scary considering it’s just free money. With your half of the equation, that’s $1,610,540.

Strategies and Limitations

This strategy can be even more beneficial if you plan on having a lower income later in life. Since you will be taxed at distribution, it’s important to plan ahead to avoid excess taxation on your retirement income.  

The maximum that can be contributed to your 401k (or similar) in 2024 is $69,000 (or $76,500 with catch-up contributions) — including both your individual contribution limit of $23,000 and employer contributions. The IRS updates the maximum contribution each year (around November). Limit increases are not guaranteed in periods of low inflation. 

Finally, if you have multiple plans from former employers, consider consolidating them into a traditional IRA to avoid losing track of them. You can even roll them into your new employer’s plan.

2. Invest for your Long-term Health in a Health Savings Account (HSA)

A HSA is a triple tax advantage way to put money away for future medical expenses while reducing your tax liability.  

If you opt into a high-deductible health plan (HDHP) either through your employer or your own private health insurance, you will automatically have access to a HSA. To be considered an HDHP, the minimum annual deductible of the policy needs to be at least $1,600 for self-only coverage and $3,200 for family HDHP coverage in 2024. 

If your plan meets this qualification, you can deposit $4,150 (self-only) or $8,300 (family coverage) away in your HSA.  

At this stage, you can either keep your health dollars on the checking side for legitimate medical or dental expenses, or you can opt to invest those dollars within your HSA into securities. For example, investing $30,000 in an available ETF yields my family nearly $1,000/yr in dividends in 2023.

The best part is that these investments grow federally tax-free. Even if $200/month was invested for 40 years at 8 percent, that’s a solid health nest egg of $644,216.

Here’s where the magic really happens:

Any distributions taken out for qualifying health expenses are also tax-free.  If you wait until you’re 65, you can take the entire balance out for any reason. However, those distributions will be taxed at ordinary federal income tax rates.

A powerful account with multiple uses.

3. Invest in an IRA Because every bit counts

An IRA is a retirement account that comes in several different forms. Each has its own tax structures, but the two most common are the traditional and Roth IRA. The contribution limit is $7,000 in 2024.

Pre-Tax with After-Tax Dollars

The traditional IRA is an investment account that you can open separately from your employer-sponsored plan. With a traditional IRA, you pay taxes when you make a withdrawal from the account. There are rules and limitations.

Once you reach 59 and 1/2 years old, you can take distributions from the account where you will pay income tax. The most important part is to avoid the 10 percent early withdrawal penalty. This would also be seen as additional income which would raise your tax liabilities.

The government does require traditional IRA investors to begin taking mandatory distributions at 73 years old. 

No Taxes on the Growth?

A Roth IRA allows your post-tax dollars, for the trade-off of tax-free growth. However, unlike the traditional IRA, once you reach 59 1/2 old, you can withdraw the funds without any additional taxation. This means that the full balance is yours at retirement.

There are some exemptions where you can dive into the funds. As long as your account is more than five years old, you can withdraw funds to pay for education expenses, first-time home purchases, and other qualifying events. 

4. Invest in your personal Real Estate or a Rental

Investing in real estate can potentially reduce your tax liability.

Whether it’s purchasing a primary residence or purchasing property for rental income, there are deductions and tax write-offs. 

In some instances, you may be able to deduct the following costs: mortgage interest, property taxes, property insurance, property management costs, building maintenance/repairs, property depreciation, and more.  

This is definitely worth looking into, especially for Air BnB enthusiasts.

5. Sell your underperforming stocks and/or Rebalance As Needed

Buying stocks is not a guaranteed win. In some instances, your stocks might not be doing well for one reason or another. There is an opportunity to claim up to $3,000 in capital losses per year. Through tax-loss harvesting, you can offset up to $3,000 in capital gains in contrast to the losses.

Beyond that, you may be able to roll over the excess amount into a tax deduction for the following tax year. 

How Does this Work?

Let’s say you bought 200 shares of stock X at $50 sometime during the year, and it’s now at $30 per share. You can potentially sell that stock and be able to write off $3,000 worth of shares (100) and roll over the remaining $1,000. Just be careful not to trigger the wash-sale which negates the entire deal.

About Author