How Your Savings Plan Affects Your Taxes

With Debra Milliken, Bank Office Manager,
Assistant Vice President,
Bank Mutual Milwaukee

There’s no such thing as tax season. Sure, they may be due in April – but thinking about the tax implications of how you manage your wealth should be part of your year-round financial strategy. Not only will it keep the tax season rush from becoming a huge headache, it’ll help you better understand your tax liability and make it easier to make corrections throughout the year.

When it comes to your savings strategy – an important component of your overall money management strategy, how you save can have as much impact on your taxes as how much you save. With that said, let’s take a look at some of the most common savings products and how they affect your tax bill. 

General Savings Accounts

Savings, checking and money market accounts have a lot of benefits, including ease of access to funds and ability to earn interest. Because the money going into your account was already taxed as income, anything you withdraw is not. However, any interest accrued will be taxed. If you’ve earned $10 or more in interest income, your financial institution will send you a 1099 form to include in your tax preparation. If not, it’s up to you to report your earnings.

Flexible Spending Accounts and Health Savings Accounts

Both FSAs and HSAs are savings accounts designed to offset rising healthcare and insurance costs by providing a source of funds for qualified medical expenses. While both are interest-accruing savings plans and therefore subject to the same 1099 declarations as a traditional savings account, there are some functional differences between the two.

FSAs are employer-originated (meaning your funds come from a pre-tax payroll deduction) and may or may not be used conjunction with a high deductible health plan (HDHP). There are few tax considerations beyond declaring earned interest.

HSAs can be established by an employer or an individual, but only in conjunction with an HDHP. Money can be withdrawn from your HSA tax-fee for qualified medical expenses. If you’re under the age of 65, funds can be withdrawn for non-qualified medical expenses with a 20 percent penalty. If you’re over the age of 65, money withdrawn for non-qualified medical expenses is considered income and must be recorded as such on your taxes.

401(k)s, IRAs and Roth IRAs

While retirement accounts are generally easier to handle at tax time, they aren’t without their considerations – in particular, a 10 percent early withdrawal penalty that is typically assessed if funds are withdrawn before the age of 59½ [see penalty exemptions].

Because 401(k)s and pensions are funded with pre-tax dollars, contributions aren’t deductible. Any withdrawals must be reported as taxable income.

With a traditional IRA, there are certain contributions that you may be able to deduct from your taxable income, however they will be fully taxable when distributed. Only earnings will be taxable when nondeductible contributions are distributed. Once you reach 70½, you have to start taking funds from a traditional IRA; if you don’t take these Required Minimum Distributions (RMDs), you may have to pay a 50 percent excise tax on the amount not distributed.

Because Roth IRAs consist of dollars that have already been taxed, it’s free to grow tax-free. Additionally, withdrawals from a Roth IRA are generally not taxable as long as funds have been in the account for at least five years and do not require withdrawals until after the death of the owner.

529 Plans

Traditionally, these savings plans encourage saving for future college costs by offer tax-free earnings and withdrawals for qualified education expenses like tuition, fees, books, or room and board. However, the Tax Cuts and Jobs Act passed last year expands this to include up to $10,000 per year tax-free for elementary, high school or homeschool expenses.

With this plan, there’s a designated beneficiary, usually the student (or future student) for whom the fund was established. The designated beneficiary can be changed to another member of the family or rolled over to another plan for a member of the beneficiary’s family with no penalty. So, for example, if your son doesn’t end up using all the funds in his 529 plan, that sum can be rolled over to his sister’s 529 plan.

If this all sounds terribly complicated, it’s because it is.

The good news is our financial advisors are here to help. You can visit your local Bank Mutual branch to get connected with one of our financial advisors who can help ease the stress of tax preparation by suggesting products that make sense for your personal financial goals as well as their tax implications.

Additional tax information and sources can be found at irs.gov.

Associated Bank – Corp and its affiliates do not provide tax, legal, or accounting advice. Please consult with your tax, legal, or accounting advisors regarding your individual situation.

Deposit products are offered by Bank Mutual. Please ask about details on fees and terms and conditions of these products. Member FDIC.

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