3 Tax Mistakes You Could End Up Sorely Regretting

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

There are different steps you can take to save money on taxes. Read on for some mistakes that might only increase your IRA burden. 

Paying taxes is a part of life. And yet most of us would probably rather do everything in our power to get out of them.

Many people can’t avoid paying taxes completely. But there are definitely steps you can take to pay the IRS less money. That, however, could hinge on avoiding these big mistakes.

1. Holding investments for a year or less before selling them

The goal of investing money is to see the value of your assets increase. Now, you should know that if you’re selling stocks at a profit in a regular brokerage account, you’ll have to pay capital gains taxes on that profit. But you can spend less on capital gains taxes if you time the sale of your assets strategically.

Profits on assets held for a year or less are considered short-term gains, whereas holding assets for at least a year and a day before selling, bumps you into the long-term capital gains category. Long-term capital gains are taxed at a more favorable rate than short-term gains. So selling investments before you’ve held them for a year and a day can be a mistake if there’s no compelling reason to do so.

It’s one thing to quickly sell shares of a stock that’s expected to release an unfavorable earnings report. In that case, waiting to sell could mean losing out on your profit. But if you’re not in a situation like that, don’t rush to sell off your assets to take your profits and run. Waiting a bit of time could save you a bundle of money.

2. Sticking to a regular brokerage account instead of an IRA

The money you put into an IRA is supposed to be earmarked for retirement. As such, there can be penalties for taking an IRA withdrawal before you reach age 59 1/2. So you may not want to keep all of your investments in an IRA. Keeping some in an IRA, however, is a smart move.

IRAs give you a tax break on the money that goes in. And gains on your investments are tax-deferred until you take withdrawals.

We just talked about ways to lower capital gains taxes. With an IRA, you won’t even have to worry about paying those taxes year after year, since you aren’t taxed on gains until you tap your account.

3. Forgoing the opportunity to fund an HSA

Healthcare is an expense people generally can’t avoid. So you might as well lower your taxes when spending money on it. That’s why passing up an HSA, or health savings account, if you’re eligible for one is a huge mistake.

To qualify for an HSA, your health plan needs to meet certain requirements. In 2024, for example, your plan will need a minimum deductible of $1,600 for single coverage or $3,200 for family coverage to be HSA-eligible.

But if your plan qualifies, you should know that HSA contributions go in tax-free like IRA contributions. HSAs also let you invest funds you don’t need to withdraw right away. Meanwhile, investment gains in an HSA are tax-free, as are withdrawals used for qualifying medical expenses.

Taxes may be unavoidable to a large degree, but that doesn’t mean you can’t get away with legally paying less. The key to doing so, though, is to know what strategies and accounts to take advantage of.

Alert: highest cash back card we’ve seen now has 0% intro APR until nearly 2025

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

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