Money Management

The sooner you work on tax-reduction strategies, the better. 

It’s fair to categorize taxes as a necessary evil. The taxes we pay help fund different public programs. But they also take some of our hard-earned money away from us. And that’s a bummer, to say the least.

The good news, though, is that there are steps you can take to lower your taxes and pay the IRS less. And if you want to minimize your tax burden in 2023, it pays to focus on doing so at the start of the year. Here are a few specific moves it pays to make early in 2023.

1. Start funding your IRA

Money that goes into a traditional IRA is money the IRS can’t tax you on. The good thing about IRAs is that you have all year to fund one. In fact, you actually have more than a year to contribute to an IRA, because you get until the following year’s tax deadline to finish pumping money into your account.

But when you put off IRA contributions, that money tends to disappear into other places, like vacations and impulse purchases. So a good bet is to start steadily funding your IRA, beginning in January. Set up an automatic transfer so that every time a paycheck comes in, a portion gets moved into your IRA before you can spend it.

2. Put money into an HSA

If you have health insurance that’s compatible with a health savings account, or HSA, then it pays to make contributions. Like traditional IRAs, HSAs give you a tax break on the money you put in. Plus, with HSAs, you get the benefit of tax-free growth on the money you invest rather than use right away, and you also get tax-free withdrawals as long as you’re taking money out for healthcare expenses.

3. Take losses on investments strategically

You may find that your brokerage account balance is down in early 2023 due to the turbulent year the stock market has had. And you definitely don’t want to start selling off different assets in a panic.

But one thing you should consider is taking a look at your investments and seeing if you own a particular asset that’s consistently been underperforming. In that case, selling it off as a loss could help you lower your taxes for the year.

Not only can you use investment losses to cancel out investment gains, but you can also use investment losses to cancel out some ordinary income. So let’s say you take a $5,000 loss on a stock but don’t make any money in your brokerage account. You’re allowed to use your loss to offset up to $3,000 of regular income, and you can then carry your remaining $2,000 loss forward into the next tax year.

If paying less tax is a goal of yours, you’re no doubt in good company. But don’t just wait until the end of the year to start focusing on strategies to lower your tax burden. Instead, start making plans to lower your taxes at the start of the year so you’re not left scrambling later on.

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Is yours on the list? 

It’s an unfortunate thing that many minimum wage workers struggle to keep up with their living costs and end up racking up debt on credit cards just to stay afloat. Given that the federal minimum wage is just $7.25, it’s easy to see why.

Now the good news is that many states have their own minimum wage requirements, and employers in some states have to pay well more than $7.25 an hour. Not only that, but a number of states are raising their minimum wage in 2023. Here’s what that list looks like.

States that raised their minimum wage on or by Jan. 1

In a number of U.S. states, a higher minimum wage is already in effect thanks to rules that changed at the very start of 2023. Here’s a list of states that now have a higher hourly minimum wage:

Delaware went from $10.50 an hour to $11.75Illinois went from $12 an hour to $13Maryland went from $12.50 an hour to $13.25Massachusetts went from $14.25 an hour to $15Michigan went from $9.87 an hour to $10.10Missouri went from $11.15 an hour to $12Nebraska went from $9 an hour to $10.50New Jersey went from $13 an hour to $14.13New Mexico went from $11.50 an hour to $12New York went from $13.20 an hour to $14.20 in Upstate New York, and $15 an hour in and around New York CityRhode Island went from $12.25 an hour to $13Virginia went from $11 an hour to $12

States whose minimum wage get a cost-of-living increase in 2023

Many people are familiar with cost-of-living increases in the context of Social Security benefits. While the above states raised their minimum wages to account for different factors, including local living costs, some states are raising their hourly minimum wage this year to simply adjust for higher inflation. Here are the states that are going that route:

Alaska’s minimum wage is rising from $10.34 to $10.85Arizona’s minimum wage is rising from $12.80 to $13.85California’s minimum wage is rising from $14.50 to $15 for companies with 25 or fewer employees, and $15.50 for companies with 26 employees or moreColorado’s minimum wage is rising from $12.56 to $13.65Maine’s minimum wage is rising from $12.75 to $13.80Minnesota’s minimum wage is rising from $8.42 to $8.63 for small employers, and $10.33 to $10.59 for large employersMontana’s minimum wage is rising from $9.20 to $9.95Ohio’s minimum wage is rising from $9.30 to $10.10South Dakota’s minimum wage is rising from $9.95 to $10.80Vermont’s minimum wage is rising from $12.55 to $13.18Washington’s minimum wage is rising from $14.49 to $15.74

More changes are arriving later in the year

There are some states that plan to raise their hourly minimum wage later in 2023:

Connecticut’s minimum wage will rise from $14 to $15 effective July 1Florida’s minimum wage will rise from $11 to $12 in SeptemberNevada’s minimum wage will rise from $9.50 to $10.25 effective July 1 among companies that offer benefits, and from $10.50 to $11.25 at companies that don’t offer benefitsOregon’s minimum wage will rise from $13.50 effective July 1, but the extent of that increase will be determined later on in the year based on data from the Consumer Price Index, which measures changes in the cost of consumer goods

How to get by on a minimum wage income

Even if your earnings are increasing this year, if you only make the minimum wage in your state, you may be struggling financially. And so a good bet in that case is to do what you can to minimize your spending.

That could mean moving in with your parents or another family member or friend for a period of time. That way, you can slash your expenses substantially and build your savings account balance so you have a cushion to fall back on.

You can also try getting a job that at least offers some benefits, like subsidized health insurance. The benefits you get could offset your lower wages to at least some degree.

Finally, it pays to do what you can to boost your skills so you’re eventually able to move out of a minimum wage job. If you work for a larger company, see if there are mentorship or training programs you can take advantage of. And if a lack of a college education is holding you back, see if your employer offers any type of tuition assistance.

It’s good to see that many states are raising their minimum wage this year. But that doesn’t mean those who earn it won’t continue to experience financial hardships.

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The sooner you open one, the more you can benefit. 

Any money you need for near-term goals or emergencies should be kept in a savings account. But money you’re earmarking for long-term goals should absolutely be invested.

When you invest your money, you give it a chance to grow into a larger sum. And your best bet when it comes to investing is to give yourself as long a window as possible to do it in.

Financial expert Suze Orman is a fan of long-term investments. She often talks about the importance of putting money into quality assets and holding them for many years on her “Women & Money” podcast.

If you’re going to invest over the years, there are different places you can put your money. You could opt to invest in a regular brokerage account, and that way, your money will be unrestricted. You’ll be able to liquidate investments and cash out at any time without penalty (though you may end up paying capital gains taxes).

But if you’re going to be investing for decades, it pays to keep your money in an account that comes loaded with tax breaks. And that’s why an IRA account may be a better choice.

The upside of using an IRA

Your goal as an investor is to make money. And while that’s a good thing, when you have a regular brokerage account and make money in it year after year, you’re also taxed year after year. With an IRA, that won’t happen.

Rather, investment gains in an IRA are tax-deferred until the time comes to take withdrawals from your account. So if you make money on investments in an IRA in 2022 but don’t take withdrawals until 2042, you won’t have to deal with taxes on your gains until — you guessed it — 2042.

Plus, the money you put into an IRA goes in tax-free and helps exempt some of your income from taxes. You don’t get this perk with a regular brokerage account.

So, let’s say you decide to put $5,000 into your IRA one year. That’s $5,000 of earnings you won’t pay taxes on.

The downside of using an IRA

IRAs come with certain rules you have to follow in exchange for getting these tax breaks. For one thing, you can’t tap your IRA until age 59½. If you take a withdrawal earlier, you’ll face a 10% penalty on the sum you remove (though there are limited exceptions).

Also, IRAs limit you to a certain contribution amount each year. In 2022, for example, you can only put up to $6,000 into an IRA if you’re under age 50, or $7,000 if you’re 50 or older.

But still, if you’re going to be investing for many years — which is a good thing to do — then it pays to enjoy tax breaks in the process. And remember, if you want to invest more than what IRAs allow for, you can always max out your IRA and then put your remaining investment dollars into a taxable brokerage account.

Either way, your goal should really be to start investing from as young an age as possible. Suze Orman talks all the time about the power of compounding — the concept of earning returns not just on your initial investments year after year, but also reinvesting your gains and earning returns on that money. And even if you decide that you’d rather stick with a regular brokerage account, the key is still to give yourself as long a window as you can.

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You might not need to put away as much as you think, especially if you’re starting young. 

Many people have financial targets they want to reach by retirement, and $1 million is a common choice. It’s a nice, round number that experts have recommended for years. Even though the average retiree doesn’t have nearly this much, it’s doable to save that much, and you don’t need a six-figure salary to get there.

Here’s how much you need to save per month to retire with $1 million

There are really only two steps to follow to retire with $1 million. First, you need to put money into your retirement accounts every month. You also need to invest that money so it will grow more. The stock market has returned an average of 10% per year over the last 50 years, so this can help you build wealth much faster.

How much will you need to save per month? That primarily depends on your age, because if you’re younger, your money has more time to grow. Let’s say you want to retire at 65, and you earn 10% per year investing your money. Here’s what you’d need to save per month depending on your age:

If you start at 20 years old, you need to save $116 per month.If you start at 30 years old, you need to save $307 per month.If you start at 40 years old, you need to save $847 per month.If you start at 50 years old, you need to save $2,623 per month.

As you can see, if you start young, it doesn’t take a huge amount of money per month to save $1 million for retirement. Even 30-year-olds could do it with a little over $300 per month. It’s when you wait until your 40s and 50s that it gets much more challenging.

How to save for retirement

The general idea behind saving for retirement is simple enough: put money in retirement accounts every month and invest it. However, there are some things you can do to speed up your progress toward that $1 million.

If you have an employer, check to see if your company offers a retirement plan. Many companies have retirement plans, such as 401(k)s, and will match your contributions up to a certain amount. For example, your employer may match 50% of your 401(k) contributions on up to 6% of your salary. This is a great way to increase your retirement savings without spending more.

In addition, 401(k) contributions are tax-deferred. You don’t pay taxes on that income, and instead, you only pay taxes on withdrawals.

Another way to save on taxes is with an individual retirement account (IRA). Unlike a 401(k), this is a retirement account you open on your own. You could get one if you’re self-employed, a small business owner, or if you already have a 401(k) and you want an additional retirement account. There are two types of IRAs:

Traditional IRAs: Contributions are tax-deductible, and you pay taxes on withdrawals.Roth IRAs: Contributions are taxed as normal income, but withdrawals are tax free.

Your other option is to invest in an individual brokerage account. This doesn’t have the tax benefits that 401(k)s and IRAs offer. The advantage of an individual brokerage account with a stock broker is you can withdraw money at any time without penalty. With a 401(k) or an IRA, there’s an early withdrawal penalty for withdrawals before the age of 59 1/2.

Is $1 million enough to retire?

A nest egg of $1 million might seem like more than enough for a comfortable retirement. It can be, but this depends on how much you expect to spend.

One way to estimate how much you need for retirement is the 4% rule. According to this rule, retirees can safely withdraw 4% of their retirement savings per year for 30 years without running out of money. If you have $1 million, that means you could withdraw $40,000 per year.

Keep in mind that you could need more money than you think for retirement. Healthcare, in particular, is often a big expense for retirees. And if retirement is still a long way away, it’s also important to consider inflation. A yearly income of $40,000 will buy far less in 30 years than it buys now. According to a recent analysis by Wealthcare Financial, Generation Z and millennials will need $3 million in retirement savings because of inflation.

Everyone’s financial needs are different, so there’s no one-size-fits-all financial target. You could be set with $1 million, especially if you don’t expect to spend a large amount in retirement. But it’s also recommended that you save as much as you can, because having more in your retirement accounts can’t hurt.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More