Taxes are an inevitability of life. As long as I’m living, I will be paying them. And for the most part, I’m proud to pay taxes. 

Our social security system has supported my grandparents’ and parents’ transition into a comfortable retirement. I’m privileged to live in a community with paved roads. My kids attend an incredible public school. And I feel safe knowing our military, police, and fire departments are watching out for us in times of crisis. 

I agree with Mark Cuban when he said, “While some people might find it distasteful to pay taxes, I don't. I find it patriotic.”

But just because I agree with the idea of paying taxes for the betterment of our society, doesn’t mean I want to overpay them. If I’m allowed to keep more of my hard-earned money and have it work hard for me, I’m game. 

Here are some tax-efficient investing strategies that helped us become a millionaire couple.

Traditional 401k Contributions

Starting in 2014, I maxed out my traditional 401k for seven years straight.

This allowed our family to defer tax payments on between $17,000 and $19,500 (depending on the year) of income each year.

(For reference, the maximum 401k contribution for 2024 is $23,000 with an additional $7,500 contribution allowed for those turning age 50 or older to catch up.)

With a lower taxable income today, our family has had the benefit of paying fewer taxes (legally).

Additionally, my employer matched 15% of my contributions to my 401k. When I contributed $19,500, they provided $2,925 of “free money.” That employer match, my earnings, and any further contributions are also tax-deferred.

The key word here is “deferred.” We will have to pay taxes on this money eventually. And with the current federal debt hovering around $35 trillion and rising, this massive tax bill will come due someday soon. 

Roth IRA Contributions

To diversify my family’s tax burden, we have also invested more in “Roth” vehicles. These are after-tax investments that allow you to pay the tax on your income today but offer tax-free growth of your investments.

While there are important differences between a Roth 401k vs Roth IRA, both serve a similar purpose: tax-exempt investment growth.

Both my wife and I have a Roth IRA, and we contributed to our accounts for over a decade. The Roth IRA requires an earned income, but even when my wife decided to stay at home with our kids, she was able to contribute to her account. A nice perk for sure! 

During our wealth-building journey, there were certain years when we were ineligible to contribute to a Roth IRA due to the income limits. When that was the case, we took advantage of what's called a Backdoor Roth IRA to keep the tax-free growth going.

With some of our investments in traditional vehicles (pre-tax) and some in Roth vehicles (after-tax), we’re feeling more comfortable. Depending on our tax bracket in retirement (and the state of tax situation in the U.S. at the time), we’ll be able to adjust accordingly when it comes to selling off our investments for income. 

Health Savings Account (HSA)

One of the most underrated investment vehicles out there is the Health Savings Account (HSA). Often confused with the FSA, the HSA can get dismissed as a limited workplace benefit option. That is not the case.

Currently, we’re using our HSA as a way to save for everyday healthcare expenses, invest for long-term healthcare costs, and if we’re lucky, enjoy the leftovers for retirement.

When it comes to tax efficiency, the HSA packs a triple-tax advantage that is hard to deny. 

• Pre-tax contributions (with your employer-sponsored plan) or tax-deductible contributions if you’re employer does not have an HSA option
• Tax-free withdrawals as long as you use the funds for qualified medical expenses
• Tax-free growth when the money is saved or invested

So far we’ve socked away around $30,000 in our HSA. With time, compound interest, regular contributions, and a little bit of luck on our side, we should have a sizable amount of money waiting for us. And with the cost of healthcare steadily rising, this is a tax-efficient investment strategy we’re enjoying right now. 

529 College Savings

Our kiddos just recently hit “double digits” at 10 and 12 years old. And by the time they reach college age, the costs will likely be in the “six digits!” 

If my daughter decides to attend my alma mater, Michigan State University (Go Green!), we’re looking at around $170,000 for four years of college starting in the year 2030. We are nowhere near that amount now, but we’re working on it with a little help from our 529 College Savings Plan.

Not all states have a state income tax deduction for 529 contributions. Luckily, our great state of Michigan does. This is just one more way we can invest with tax efficiency in mind. 

In addition to the state income tax deduction, our after-tax 529 contributions grow tax-free. Over the last twelve years, our daughter’s 529 balance has grown to around $65,000. More than half of that amount consists of tax-free earnings. That sort of tax benefit makes me smile. 

Final Thoughts on Tax-Efficient Investing

We’re not able to escape taxes entirely, but we can learn to live with them and reduce them when possible. I mentioned just a few tax-efficient options. Depending on your income, your stage in life, and your goals, there are other routes to consider as well including:

• Self-Directed IRAs
• SEP IRAs (Simplified Employee Pension)
• Solo 401k
• 457 or 403(b)
• SIMPLE IRAs (Savings Incentive Match Plan for Employees)

Oftentimes people consider housing, transportation, and food as our largest expenses. We can forget the impact of taxes and how they affect our present and our future.

I feel a sense of pride and patriotism paying my taxes, but I also love saluting my frugal flag.

What do you think of these tax efficient investing strategies? Which of these are you taking advantage of on your family wealth and happiness journey?

Please let us know in the comments below.