How to Optimize Tax Savings if you Earn W-2 Income

If your sole earnings are W-2 wage income from your employer, while you are a bit limited in tax planning opportunities, there are still several strategies to consider. Here's a list of a few common strategies:

1. Max out pre-tax 401(k) - you can make tax deductible contributions to your retirement account up to the pre-tax contribution limit ($23,500 in 2025).

   
   

2. Backdoor 401(k) Roth contributions - if you reach the pre-tax contribution limit, depending upon the flexibility in your employer's retirement plan, you may be able to make after-tax Roth contributions up to the employee and employer max contribution limit ($70,000 in 2025).

   
   

3. Backdoor Roth: traditional IRA - you can open a traditional IRA and make an after-tax contribution to that (e.g., up to $7,000 limit in 2025) and convert it to a Roth account.

   
   

4. Health savings account (HSA) - if you are in a high-deductible health plan, you could open an HSA and make tax deductible contributions to that account ($4,300 for an individual and $8,550 for family coverage in 2025). HSAs can provide a triple-tax advantage as the contributions are tax deductible, growth is tax free, and withdrawals for certain "qualifying" medical expenses are tax-free. After age 65, you can withdraw funds from an HSA for any type of use without penalty, although withdrawals at that point will be taxed similar to a traditional 401(k).

   
   

5. 529 plan for education savings - although contributions to a 529 plan are not deductible for federal tax purposes (the state tax deductibility rules differ - MA offers a $2,000 annual deduction for joint filers), earnings accumulate tax-free while in the account and distributions can be tax-free when used to pay for qualified education expenses.

   
   

6. Tax-exempt interest - instead of keeping your cash savings in a high-yield savings account, investing cash in US treasuries or municipal bonds can provide a similar yield but be exempt from state (US treasuries) or federal and potentially state taxation (municipal bonds).

   
   

7. Additional planning items - there are other tax planning strategies you can look to implement depending upon your specific situation and goals (e.g., planning for stock-based compensation including Section 83(b) elections, avoiding passive activity loss limitation through investing in short-term real estate rentals, having a cost segregation study performed for real estate rental property to accelerate depreciation deductions, etc.).