Tax-saving tips

I list some legal tax-saving tips that I learned over the years.

HSA

With an HSA (Health Savings Account), you can contribute up to $8,550 in 2025 as a family and deduct the amount from your income. The investment grows tax-free. You can then use the funds for qualified healthcare expenses, such as medical/dental bills and prescription drugs. As healthcare expenses are exorbitant in the U.S., HSAs help alleviate some of the pain.

Retirement accounts

There are employer-sponsored accounts, such as 401(k), 403(b), and 457(b), as well as individual retirement accounts (IRAs). Both account types allow you to choose between traditional and Roth options. With a traditional account, you contribute pre-tax dollars, lowering your taxable income now, but you pay taxes on withdrawals in retirement. With a Roth account, you contribute after-tax dollars, and qualified withdrawals are tax-free in retirement. There are two main considerations for choosing between traditional and Roth accounts.

1. If you are in a high (low) tax bracket now but expect to be in a low (high) tax bracket in retirement, traditional (Roth) may be better. But predicting future tax rates is difficult. Diversifying between traditional and Roth may be a good idea.
2. If the tax rates between now and the future are the same, then Roth is strictly better than traditional. This is because (a) Roth does not have required minimum distributions (RMDs), so it is more flexible, and (b) because the nominal contribution limits of traditional and Roth are the same, Roth allows larger investments in terms of after-tax dollars. (E.g., if your marginal tax rate is 33.3%, contributing $10,000 to a traditional pre-tax is equivalent to contributing $6,666 to a Roth after-tax. In this example, the contribution limit of Roth is effectively \(1/(1-0.333)=1.5\) times larger than traditional.)

Roth conversion

If you already have traditional retirement accounts, you can do a Roth conversion any time. But it is important to decide the amount and timing of the Roth conversion.

1. For the amount: since traditional accounts are tax-deferred, you owe income tax on the full conversion. Estimate your tax bracket near year’s end and convert enough to stay in a lower bracket.
2. Regarding the timing, if possible, it is best to do a Roth conversion during a market downturn, because that way you generate less income for the same number of shares converted.

Backdoor Roth

Although Roth IRA contributions have income limits, you can bypass them using the “backdoor Roth” loophole. Here is how it works.

1. During the year, contribute to a traditional IRA ($7,000 in 2025).
2. During the same year, convert a traditional IRA to Roth.

See here for a good explanation.

Donate appreciated stocks to kids

If you have kids (who can be trusted), you can save on taxes by donating appreciated stock to them. Here is why.

1. If you are a married couple filing jointly, you can donate up to the annual exclusion limit of $19,000 per person ($38,000 for married couples filing jointly) without paying gift tax.
2. However, if you gift stocks, the recipient inherits the cost basis of the donor, so there will still be capital gains if the investment is sold. Currently, a child’s unearned income (e.g., capital gains) of more than $2,700 is taxed at the parents’ rate (see here).
3. Therefore, as long as you donate stocks with capital gains up to $2,700 and assuming the child has low income, there will be no capital gains tax. Thus, if you trust your kids, you can donate appreciated stocks with capital gains up to this limit, let them sell the investment, and then ask them to pay the bills.
4. You can donate appreciated stocks to your minor children by using UTMA accounts.