It’s open enrollment season right now and I’m a little bit bummed. For the past few weeks, I’ve been getting text messages from my previous employer (which happens to be the State of Minnesota) reminding me to enroll in my workplace benefits for the coming year. Since I no longer work for the state, I obviously can’t take advantage of any of these benefits.
Working for the state had some pretty nice perks. Not only did I get a 6% match on my retirement accounts, but I was also able to utilize a High Deductible Health Plan (HDHP), which, in turn, gave me access to a Health Savings Account (HSA). The HSA, as many of us personal finance nerds know, is probably the ultimate secret retirement account for millennials. That’s because, in addition to giving us lower premiums at a point in our life when we’re probably using very little healthcare, the HSA also has the unique ability to offer us triple tax-advantaged savings.
For pretty much every tax-advantaged account, you’ll pay taxes at some point in your life.
- With tax-deferred accounts, you avoid paying taxes on your contributions now, but you’ll pay taxes on your contributions when you withdraw them.
- In contrast, with Roth accounts, you make contributions using your post-tax income but can then withdraw that money tax-free in the future.
The interesting thing though, is that there are accounts out there that let you put your money in tax-free, grow your contributions tax-free, and take your money out tax-free. These triple tax-advantaged accounts basically allow you to earn and grow your income without ever paying taxes on it.
Obviously, if we can earn and grow our income without ever paying taxes on it, we want to take advantage of that as much as we can.
With that in mind, let’s take a look at a few of the ways we can get triple tax-advantaged savings (i.e. tax-free contributions, tax-free growth, and tax-free withdrawals).
Use A Health Savings Accounts
The first and most obvious way to get triple tax-advantaged savings is by making use of an HSA.
For most millennials, taking advantage of an HSA is a no-brainer. You’re probably not a heavy user of healthcare at this point, so it makes sense to enroll in an HDHP, pay less in premiums each month, and gain access to an additional tax-advantaged retirement account. For myself, in the 4 years since I graduated law school, I’ve gone to the doctor a grand total of ONE time – and only because my wife made me go.
What makes the HSA so amazing though isn’t just the additional tax-advantaged space – it’s the fact that contributions to an HSA have the ability to be triple tax-advantaged. Your HSA contributions go in tax-free, grow tax-free, and can be withdrawn tax-free so long as they’re used for qualified health expenses (after age 65, any remaining contributions can be withdrawn and get taxed at your ordinary income rate, basically the same as any other tax-deferred account).
An HSA has the potential to add up to A LOT of potentially triple tax-advantaged money. Here are what the HSA contribution limits look like for 2017 and 2018:
- For 2017, max of $3,400 for individuals, $6,750 for families
- For 2018, max of $3,450 for individuals, $6,900 for families
Depending on whether you’re an individual or a family, those contributions can grow to somewhere between $300,000 and $700,000 in potentially triple tax-advantaged savings over a 30-year period.
I’ve written about HSAs before here and here, so I recommend checking these posts out if you’re looking for some more in-depth info on how HSAs work.
The main thing to take away from this is that if you’re young and in good health, you should probably take advantage of an HSA. The tax advantages are just way too good to pass up.
Fund A 529 Plan
Most people think of 529 plans as a way to get tax-free growth for future college expenses, but interestingly, 529 plans also provide a terrific vehicle to turn otherwise taxable income into triple tax-advantaged savings – at least with respect to state taxes.
Here’s how it works. Depending on where you live, your state might offer a state tax deduction for contributions made to a 529 plan. You’ll need to check your particular state law to determine if this is available to you and what the requirements are to qualify for the state tax deduction (I found this great calculator from Vanguard that provides a great starting point).
If you live in a state that offers a tax deduction for 529 plan contributions, that means that the deductible amount that you put into your 529 plan can become triple tax-advantaged – you can put money into your 529 plan and take it out without ever paying any state income taxes on that income.
The caveat, of course, is that your 529 funds have to be used for qualified education expenses. Still, assuming that you will have some educational expenses, the 529 plan makes a lot of sense.
What a lot of people often forget is that 529 plans don’t have to be for your children – you can use them for yourself too. If you’re a current student and paying tuition out of pocket, you should consider funneling your tuition payments through your 529 plan in order to turn that taxable income, into tax-free income (I wrote about this 529 plan hack in this post from earlier this year).
Take my home state of Minnesota as an example. The legislature here recently passed a law allowing single individuals to deduct up to $1,500 from state taxable income and up to $3,000 from state taxable income for married couples.
This works perfectly for a couple like my wife and I. She’s still a resident and her residency requires her to pay a fairly small amount of tuition – about $4,000 or so each semester. By funneling our tuition payments through her 529 plan, we can essentially turn $3,000 of her tuition payments into completely, tax-free income.
Take Advantage Of The Master’s Rule To Fund Your Roth IRA
The Master’s Rule is another option that can allow you to turn tax-free income into completely tax-free growth – in a way.
I’ve written about the Master’s Rule before, but as a quick recap, the IRS allows you to earn rental income completely tax-free so long as you rent out your property for 14 days or less in a calendar year.
If you take that tax-free income and fund some or all of your Roth IRA with it, you’ve essentially turned tax-free income into tax-free growth too. You’ve put in money that you paid no taxes on and you’ll be able to withdraw that money tax-free in the future too (of course, to do this, you’ll have to have some taxable income during the year).
For most homeowners, renting out a property for 14 days is doable. That’s just 2 or 3 days per month – which anyone can do using Airbnb. How much you can earn in that 14 days will really depend on how you choose to rent out your property.
If you’re like me, you probably have an empty guest room in your house, which means at minimum, you’ve got the ability to earn at least some tax-free rental income without having to really do anything beyond opening up a room in your house.
If you’re in a location that has desirable events, it’s possible for you to earn huge amounts in a very short period of time. Someone in Minneapolis this year could easily put up their home on Airbnb during the Superbowl, rent it out for a few thousand dollars over a weekend, and pocket all of that income, totally tax-free (people here did the same thing during the Ryder Cup in 2016). For some people, 14 days can be enough to fully fund a Roth IRA with tax-free income.
Do Roth Conversions In Low Earning Years
Roth Conversions are a way to take advantage of low earning years, potentially allowing you to turn tax-deferred contributions into tax-free growth and tax-free withdrawals.
In order to do this, you’ll have to convert your deductible IRA contributions in years where you’re earning essentially little to no income. I think three people really stand to take advantage of Roth Conversions:
- Folks who are hitting early retirement and have enough cash on hand to cover their lifestyle for five years, or
- Folks who are going back to school full-time and have money in an IRA that they can convert; or
- Folks doing a mini-retirement that will have a no-income year.
This will go beyond the subject of this post, but essentially a Roth Conversion works like this. You convert income from a deductible IRA to a Roth IRA. After five years, you can then withdraw that conversion, completely tax-free. Of course, you can also just leave that income in there, allow it to grow, and then withdraw it tax and penalty free after 65.
The conversion from an IRA to a Roth IRA is a taxable event itself – it counts as earned income for the year. But if you’ve got a low enough income for the year, either because you’ve saved that much in cash or you’re a student in a low-earning year, you’ll have an income for the year that’s low enough that you’ll owe no taxes anyway.
Takeaways
The main thing to take away from this post is that there are ways to turn taxable income into completely tax-free income. You just have to be willing to think creatively and use the tax-advantaged accounts that are available to you.
Most people, depending on where they live and what kind of work they do, will be able to take advantage of all of these methods of gaining triple tax-advantaged income. Even a few thousand dollars of triple-tax advantaged savings per year will add up to huge amounts of tax-free income in the future.
So, some things for you to do right now:
- If you haven’t already, check to see if enrolling in an HDHP makes sense for the upcoming year. If so, make sure to utilize the HSA as much as you can.
- Does your state offer a tax deduction for 529 plan contributions? If so, assuming the rest of your financial house is in order, take advantage of it.
- Any chance you’d consider doing Airbnb for 14 days or less in a year? Even if you hate people, I bet you can handle hosting someone for 2 or 3 days per month. Then, take those earnings and dump them into a Roth IRA.
- Check to see when you can strategically do Roth Conversions during very low-income years.
Any other ways of getting triple tax-advantaged savings that you are doing?
*Note, I’m definitely not a tax professional, so talk to your tax person first.
More Recommended Ebike/Scooters
Check out these other ebikes/scooters I've had the chance to do a review for:
- GEN3 Outcross Bike – The GEN3 Outcross is a solid, affordable fat tire ebike that does a good job of doing what I need it to do. It works great for city riding, giving me a smooth ride in all conditions. It’s works really well as a winter ebike since the fat tires give it good traction over snow and ice. Check out my GEN3 Outcross Review.
- Himiway Escape Bike – The Himiway Escape is an interesting bike for anyone looking for a moped-style ebike. If you’re a gig economy worker, the Himiway Escape is particularly interesting and it’s possible to think of it as an investment, especially if you can opt to do deliveries with the Himiway versus using a car. It’s not cheap, but you can definitely make your money back when you compare the mileage you’ll put on your car versus using an ebike. Check out my Himiway Escape Bike Review.
- Espin Sport Bike – The Espin Sport is a good ebike for someone who is looking for an ebike that feels and rides more like a regular bike. There are many ebikes that are really only bikes in name. In reality, they’re basically electric mopeds. The Espin Sport, by contrast, is a bike you could probably ride without the battery and you’d feel like you’re just riding a regular bike. Check out my Espin Sport Review.
- Varla Eagle One Scooter – The Varla Eagle One is an excellent scooter that can make sense for a lot of people. It can work as a primary mode of transportation. You can use it to work on gig economy apps like DoorDash, Uber Eats, and Grubhub. And it can also be a recreational vehicle if you’d prefer to use it for that. Check out my Varla Eagle One Review.
- Fucare H3 Scooter – The Fucare H3 is a fun scooter and I’ve enjoyed testing it out. For a daily commuter or quick trips or errands, the Fucare H3 is probably the scooter I’ll use. It’s portable and easy to maneuver, so it’s just easier to take on the road when I need it. Check out my Fucare H3 Scooter Review.
More Recommended Investing App Bonuses
For additional investing app bonuses, be sure to check out the ones below:
- M1 Finance ($100) – This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account. Check out my M1 Finance Referral Bonus – Step-By-Step Guide.
- SoFi Invest ($25) – SoFi Invest is an easy brokerage account bonus that you can earn with just a few minutes of work. Use my SoFi Invest referral link, fund your SoFi Invest brokerage account with $100 and you’ll get $25 of free stock. I also have a step-by-step guide for the SoFi Invest referral bonus.
- Moomoo (5 free stocks) – Moomoo is a free investing app currently offering 5 free stocks (usually worth around $75-$100) if you open an account using a referral link and deposit $2,000. Read my Moomoo referral bonus guide for more information.
- Webull (5 free stocks) – Webull also gives you 5 free stock valued between $3-$3,000 each if you open an account using my referral link. Here’s a guide I wrote about how to earn your free stocks using Webull.
- Robinhood (1 free stock) – Robinhood gives you a free stock valued between $2.50-$225 if you open an account using my referral link.
- Public (1 free stock) - Public gives you a free stock valued between $3-$70 if you open an account using my referral link.
More Recommended Bank Account Bonuses
If you’re looking for more easy bank bonuses, check out the below options. These bonuses are all easy to earn and have no fees or minimum balance requirements to worry about.
- GO2Bank ($100) - GO2Bank is an easy bank bonus that I recommend people take advantage of if they have an easy way of meeting the direct deposit requirement. I like that it’s easy to open the account and that the bonus pays out quickly. Check out my step-by-step guide on how to earn your GO2Bank $100 referral bonus.
- Chime ($100) - Chime is a free bank account that offers a referral bonus if you use a referral link and complete a direct deposit of $200 or more. In practice, any ACH transfer into this account triggers the bonus. This bonus is easy to earn and posts instantly, so you’ll know if you met the requirements as soon as you move money into the account. I wrote a step-by-step guide on how to earn your Chime referral bonus that I recommend you check out.
- US Bank Business ($750) – This is a fairly easy bank bonus to earn, since there are no direct deposit requirements. In addition, you can open the Silver Business Checking account, which comes with no monthly fees. Check out how to earn this big bonus here.
- SoFi Money ($275) – SoFi Money is a free checking account from SoFi. They’re currently offering a $25 referral bonus if you open a SoFi account with a referral link and deposit $10. You can also make an additional $250 as well if you complete a direct deposit. This is a good bank that is also 100% free, so you won’t have to worry about managing this account. Here’s a post I wrote with instructions on how to earn your SoFi Money bonus: SoFi Money Referral Bonus: Step By Step Guide.
- Fifth Third Bank ($225) – This offer is limited to customers in the following states: Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, Tennessee, West Virginia, and South Carolina. If you don’t live in one of those states, you won’t be able to open an account online but you can still open an account in-branch if you happen to be visiting a city that has a branch. This is a fairly easy bank bonus to earn, especially since there are plenty of data points showing what will trigger the direct deposit requirement. In addition, you can open the Fifth Third Momentum Checking bank account, which comes with no monthly fees or minimum balance requirements. Read my guide on this bonus here.
- Fairwinds Credit Union ($100) – Fairwinds Credit Union is offering a referral bonus for users that sign up using a referral link. Fairwinds has no fees or minimum balance, so this is a particularly easy bonus to earn. Since this is a smaller credit union, my gut instinct tells me this offer won’t be around long, so if you’re in a position to meet the bonus requirements, grab this bonus before it’s gone. Here is my step-by-step guide on how to earn your Fairwinds Credit Union bonus.
- Netspend ($40 + 5% Interest Savings Account) – Netspend is a company that provides 5% interest savings accounts. If you sign up using my referral link, you’ll get a $40 signup bonus once you make your first deposit into your Netspend account of $40 or more. That means you get a 5% interest savings account and a free $40 to start! Make sure to check out my in-depth guide on how to set up these accounts.
- Current ($50) – Current is a free fintech bank that’s offering new users a $50 referral bonus after signing up for an account using a referral link.Current is an easy bonus to earn and also gives you access to three savings accounts that pay you 4% interest on up to $2,000. That means you can put away up to $6,000 earning 4% interest. That’s very good and makes Current an account I recommend to everyone. Check out my step-by-step guide on how to earn your Current Bank bonus.
- Digital Federal Credit Union ($20) – Digital Federal Credit Union (DCU) is a free, nationwide credit union that I recommend to readers for two reasons. First, DCU has a $20 referral bonus if you open a free DCU checking account with a referral link. Second, DCU has a saving account that gives you 6.17% interest on your first $1,000. Check out my in-depth post on how to set this account up.
- Novo Bank ($40) - Novo bank is a free business checking account that’s currently offering a $40 bonus if you open a Novo business checking account using a referral link. In addition to being a good bank bonus, Novo is also a good business checking account. It has no monthly fees or minimum balance requirements and operates a good app and website. Indeed, it’s the business checking account I currently use for this blog. Check out my post on how to easily open a Novo account.
- Varo ($30) – Varo is a free fintech banking app similar to Chime or Current. It’s currently offering a $30 bonus to new users that open a new Varo account with a referral link. The bonus for this bank is very easy to meet, all you need to do is spend $20 within 30 days of opening your Varo account. Check out my step-by-step guide to learn how to earn this bonus.
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link, and an additional $250 if you complete a direct deposit.
- US Bank Business. US Bank is currently offering new business customers a $750 signup bonus after opening a new account and meeting certain requirements.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account.
- DCU. Digital Federal Credit Union (DCU) is a free, nationwide credit union that I recommend to readers for two reasons. First, DCU has a $20 referral bonus if you open a free DCU checking account with a referral link. Second, DCU has a savings account that gives you 6.17% interest on your first $1,000.
- Personal Capital. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.
Feel free to send Kevin a message here.
HSA is the biggest thing for me on this list. We’re definitely not in low-income years at the moment, have no foreseeable education expenses for the remainder of our lives, and while AirBNB sounds interesting we’re sadly part of an HOA which prohibits short-term rentals like that…so that’s off the table. Boo!
Still, an HSA is awesome and like you I basically never go to the doctor so our out-of-pocket expenses are extremely low.
Yeah, I’m bummed because my new job doesn’t have a HDHP, so I can’t get an HSA anymore. They do pay for my whole health insurance premium though, so I’m not paying anything for health insurance, which is at least a nice bonus.
A big one is the dependent care FSA for those with children. Payouts are tax free and then roll the cash into a Roth.
Oh nice! I didn’t know about this one. Will have to look this up and add to the list.
I recently crunched the numbers to see of a lower deductible plan would be worth switching to during a year we plan to have our next child. The high-deductible, HSA plan is actually more cost effective. The key is to look at what the max-out-of pocket is. Now, most of a delivery for a new child is covered, but for us the epidural and a few other things weren’t covered. For my health plan, the HSA max out of pocket was less than the higher premium plan! So run the numbers!!
Good point about crunching the numbers!
The other amazing thing about an HSA and a dependent care FSA is that if you contribute directly from your paycheck through your employer, it’s not subject to FICA taxes (Social Security and Medicare). That’s another 7.65% (of course high-income earners are already capped in their social security earnings anyway).
Taxes really make a huge difference in how much money you are keeping. Great post FP!
Right! As far as I know, HSA contributions directly from your paycheck are the only way to get around FICA taxes – so definitely worth taking advantage of that if you can.