Peter Dunn: Don’t get spooked by shuffling money for tax purposes

Dear Pete,

I just got an email from my accountant, and he wants us to make a number of large, last-minute deposits into various things in order to lower our taxes. We could do it, but it would lower our emergency savings to around six months of expenses, down from eight months or so. This makes me a bit uncomfortable, but he said contributing to our HSA, 529 plan and a Roth is the right thing to do. Can you talk me into this, please?

—Jason, Greenfield

I love arbitrary numbers. Six is fun, because it’s a half a dozen and half a year (when counting months). Numbers like five and 10 always get people excited, too. I’m not quite sure why. But 8? Eight is such a strange, arbitrary number. However, as arbitrary numbers go, it’s just as good as any other.

Speaking of arbitrary, the IRS chose $8,300 in 2024 for family HSA contributions, an arbitrary increase of $550 from the previous year. Then they chose $7,000 for those under age 49 looking to make a Roth contribution and $8,000 for 50 and above.

Do you know what’s not arbitrary? Keeping and growing your money. Yet, oddly, we often feel like last-second fund shuffling for tax purposes separates us from our money. It doesn’t.

Look at the picture of me that accompanies this column. When pressed, you’d be forced to admit that I look like the type of person who has a top-3 list of favorite financial products. Welp, the shoe fits. At the top of my arbitrary list you will find a Health Savings Account (HSA). While I don’t love health care expenses, I do love paying for those pesky expenses in a tax-advantaged way. I don’t know how old you are, but I do know that people don’t spend less on health care as they age. They spend more.

Put as much money as you can into your HSA. You are virtually guaranteed to use it, and on the small chance you don’t, you can eventually use the money for non-health-care-related expenses. I’ve always viewed my HSA as my “health care 401k.” In other words, at the very least it’s a health care fund for my retirement years. I operate in this capacity in order to protect my 401(k) from being spent on health care. From a tax standpoint, using my 401(k) for health care expenses is wildly tax-inefficient. The HSA is triple-tax-advantaged, whereas your 401(k) is only double-tax-advantaged. Three is more than two. So there you go.

As far as I’m concerned, I just talked you into topping off your HSA to the allowable maximum contribution. Now onto the 529 plan. While the HSA is a no-brainer from a tax perspective, the 529 rationalization is a bit more nuanced. Yes, your accountant is instructing you to make the contribution for tax purposes, but I think your decision is a bit deeper than that. If your goal is to help your child avoid student loans, and your 529 balance currently won’t allow you to do that, then topping off that account in a tax-sensitive way is also a no-brainer. If you’re committed to avoiding student loans, you would likely take that money out of savings later anyway.

Now let’s examine the Roth IRA contribution recommendation. That particular move wouldn’t decrease your tax burden for tax year 2024, but that doesn’t mean you shouldn’t convert some non-qualified funds to (tax) qualified funds. Frankly, I’m also OK with this move. It helps you prepare for retirement, while also making you uncomfortable enough to increase your emergency fund from 6 months up to your standard and arbitrary 8 months.

I know someone is in a good position when they are both considering topping-off their tax-advantaged accounts and they actually have the ability to do it. Based on what you shared with me, especially the arbitrary goals you’ve set for your emergency fund, it makes a tremendous amount of sense to follow your accountant’s recommendations.•

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Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to [email protected].