Less than 30? Here are 3 smart money moves you can make today

A young couple having a serious argument sitting on the floor in their living room.

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Young professionals are in a great place to build wealth.

Key points

  • Switch to Roth contributions to optimize your lifetime tax liability.
  • Strategically use an HSA to take full advantage of triple tax benefits.
  • Stay away from cash to maximize growth potential.

If you’re under 30, you’re in a unique position to take advantage of a long-term horizon before retirement. By saving and investing strategically, you can build your financial future. While saving is one factor in financial success, another important factor is tax liability.

1. Make Roth contributions

Roth retirement accounts, including Roth IRAs, are savings vehicles that offer significant tax advantages. Paying taxes on contributions today allows for tax-free withdrawals in the future. Many Americans are eligible to contribute to Roth IRAs, and while fewer have access to Roth 401(k) accounts, the vehicles work in a similar way.

Read more: Our best Roth IRAs for June 2022

So why would you want to pay taxes in advance? The main reason is due to an alleged higher tax rate in the future. This could be due to several reasons. If you, as a young professional, are in your lowest earning years, it may make sense to contribute to a Roth account because high savings levels can push you into high tax brackets in retirement. Another reason is an expected increase in future tax rates. Currently, Americans pay taxes at historically low rates. Assuming Congress raises tax rates in the future, tax-free Roth distributions will be incredibly valuable. Whether at the individual or national level, Roth contributions protect against higher future tax rates by paying the tax liability early.

2. Use an HSA

One of the few triple tax-advantaged savings vehicles, a health savings account, or HSA, is an account young professionals should take advantage of. One strategy to use with an HSA is to save today and spend tomorrow, taking advantage of tax-free growth.

Basically, the strategy works like this: After you open an HSA, you or your family make a deductible contribution up to the maximum annual amount of $3,650 or $7,300 for families. Then, as medical expenses are incurred, you pay out-of-pocket expenses and keep receipts. In the meantime, the HSA can grow tax-free. At retirement, the HSA, which has likely grown significantly, can be depleted tax-free with proof of qualified medical expenses, no matter how long ago they occurred.

This strategy may be right for you if you are in good health and can afford your health care expenses out of pocket. Young professionals, who are generally in relatively good health, are likely to incur fewer medical expenses today, allowing for more growth potential. Being able to pay out of pocket is important because it allows the cash in an HSA to grow, but that shouldn’t come at the expense of cash flow security. An HSA acts to protect you and your family from unexpected medical expenses, but using it strategically can also save you tax time.

3. Get rid of the cash

Maintaining an emergency fund is a vital part of a healthy financial plan. Experts suggest keeping expenses in cash for three to six months. However, cash is a non-growth asset that is susceptible to losing purchasing power, especially in our high inflation environment.

Instead of having large amounts of cash on hand, consider building your emergency fund and investing the rest. Combine these additional savings with a tax-advantaged account to make the most of the cash you invest. Whether the balance is invested in a brokerage account, an IRA, or supplements higher 401(k) deferrals, high savings rates can make a big difference for the young worker. As with many of the tips in this article, small adjustments made today can lead to big changes later, especially when made early in your financial journey.

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