Saving outside your plan

Your employer’s plan is not the only way you can save and receive tax benefits. Several other account types offer tax advantages to help you work towards important savings objectives:

CollegeAmerica and ABLEAmerica are nationwide plans sponsored by Virginia 5 2 9.

Individual retirement accounts (IRAs)

Like your employer’s retirement plan, IRAs allow you to invest money for retirement while providing tax benefits, as well. You can invest up to $6,000 in 2022 — or up to $7,000 if you’re 50 or older.

There are two kinds of IRAs to consider — Traditional and Roth.

Traditional IRA

Roth IRA

  • You may qualify for a tax deduction on contributions if you are within certain income limits. Your contributions grow tax-deferred; you pay taxes when you withdraw the money.

  • You pay taxes now on contributions. Withdrawals are free from taxes as long as you meet the conditions below.

  • To avoid paying a 10% penalty on withdrawals, postpone taking distributions until you are at least 59½.

  • You can withdraw your earnings tax-free and penalty-free if you have owned the account for five years and meet one of the following conditions: you are age 59½ or older, you are disabled, you are withdrawing up to $10,000 to purchase your first home or the distribution is to your beneficiary after your death. You can withdraw your contributions tax-free and penalty-free at any time.

  • Withdrawals are mandatory each year, beginning no later than April 1 following the year you reach age 72.

  • Mandatory withdrawals do not apply during your lifetime.

  • If you are covered by a retirement plan at work, you can no longer deduct contributions from your taxes if your household income is $78,000 or more for single tax filers or $129,000 for joint tax filers ($214,000 if only your spouse is covered by a plan at work). No income limit applies if neither you nor your spouse are covered by a retirement plan at work.

  • You can no longer make contributions to a Roth IRA if your household income in 2022 is $144,000 or more for single tax filers or $214,000 for joint tax filers.

Contact your financial professional or visit capitalgroup.com for more information about IRAs.

Brokerage accounts

While your savings do not grow tax-deferred in a brokerage account as they would in a Traditional IRA or 401(k) plan, you can still take advantage of another tax-friendly saving opportunity by investing in mutual funds outside of your retirement plan. Current tax rates on qualified dividends and long-term capital gains can be considered favorable when compared with regular income tax rates.

  • The top tax rate on qualified dividends is 20%*.
  • The top tax rate on long-term capital gains is 20%*.
*This rate does not include the 3.8% Medicare surtax applicable to net investment income for higher income taxpayers.

You can save even more in a brokerage account by investing in tax-exempt bond funds. These mutual funds typically invest in bonds issued by state and local governments to finance projects such as highways, schools, hospitals and airports.

  • Dividends paid by these funds are exempt from regular federal income taxes.
  • State-specific tax-exempt funds can offer both federal and state tax advantages.
  • The higher your tax bracket, the more benefit there is to investing in tax-exempt bond funds.

For more information on investing in mutual funds, click here. For information on American Funds tax-exempt bond funds, click here. Your financial professional can help you select from these or other tax-exempt funds that may be right for you.

Variable annuities

A variable annuity is an investment that includes an option that can help make sure you don’t outlive your assets.

  • Taxes aren’t due until earnings are withdrawn. (Note that you may have to pay a 10% federal penalty tax on earnings withdrawn before age 59½. Surrender charges and other costs may apply.)
  • Your money is invested in professionally managed funds that are similar to mutual funds.
  • Returns fluctuate as the prices of the stocks and bonds in the funds rise and fall, so the returns are variable.
  • They typically include a death benefit that can provide some protection to your beneficiaries.
     

For information on the American Funds Insurance Series® suite of variable annuities, click here. Your financial professional can help you select from these or other variable annuity products that may be right for you.

Education savings programs

If you’d like to put money away for college tuition or other education expenses and receive certain tax benefits, consider these three options:

 

529 plan

Coverdell education savings account

UGMA/UTMA custodial account
People of all income levels can contribute
√
 
 √
Withdrawals for qualified expenses are free from federal taxes. Tax deductions may be disallowed in the event of non-qualified withdrawals
√
√
 
State tax deductions/credits for residents of some states
√
 
 
Account owner always controls the account
√
 
 
Beneficiary changes permitted
√

√
 
Withdrawals for certain student loan expenses are free from federal taxes, up to a $10,000 lifetime limit for each beneficiary and their siblings
√

 
 
How much can be contributed per year
Contribute up to $16,000 per year per beneficiary ($32,000 for married couples) without gift tax consequences. Under a special election you can accelerate up to five years’ worth of investments and contribute up to $80,000 ($160,000 for married couples) at one time without gift-tax consequences.

Up to $2,000 per tax year (per recipient).

Contribute up to $16,000 per year per beneficiary ($32,000 for married couples) without gift tax consequences.

Note: States take different approaches to the income tax treatment of withdrawals. For example, withdrawals for K–12 expenses may not be exempt from state tax in certain states.

If you accelerate gifts to a 529 account beneficiary, no additional gifts can be made to that beneficiary over the next four years after the year in which the one-time gift is made. If the donor of an accelerated gift dies within the five-year period, a portion of the transferred amount will be included in the donor’s estate for tax purposes. Consult with a tax advisor regarding your specific situation.

For more information on how to invest in CollegeAmerica®, a 529 savings plan from Capital Group, click here or contact your financial professional to open an account.

ABLE account

If you or a loved one are disabled or blind, you may be able to save for disability expenses while receiving tax benefits through an ABLE account. 

The beneficiary must be blind or disabled from a condition that began before age 26.

With an ABLE account:

  • Anyone can contribute to an account, up to a total of $16,000 per beneficiary across contributors for 2022.
  • Beneficiaries can save up to $100,000 without impacting their eligibility for Supplemental Security Income (SSI).
  • Savings grow free from federal taxes, and in some cases state taxes, and withdrawals are free from federal taxes if used for qualified disability expenses. State tax treatment varies.
  • Funds can be used for basic living expenses, housing, health care, assistive technology and other qualified disability expenses.
     

If withdrawals are used for other purposes, the earnings are subject to a 10% federal tax penalty as well as federal and, if applicable, state income tax. 

For more information on how to invest in ABLEAmerica, an ABLE plan from Capital Group, click here or contact your financial professional to open an account.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. Similar information is contained in the CollegeAmerica Program Description, which can be obtained from a financial professional and should be read carefully before investing. Similar information is contained in the ABLEAmerica Program Description, which can be obtained from a financial professional and should be read carefully before investing. ABLEAmerica is distributed by Capital Client Group, Inc., and sold through unaffiliated intermediaries. CollegeAmerica is distributed by Capital Client Group, Inc., and sold through unaffiliated intermediaries.
Depending on your state of residence, there may be an in-state plan that provides state tax and other state benefits, such as financial aid, scholarship funds and protection from creditors, not available through CollegeAmerica. Depending on your state of residence, there may be an in-state plan that provides state tax and other state benefits not available through ABLEAmerica. Before investing in any state's 529 plan, investors should consult a tax advisor. ABLEAmerica is a nationwide plan sponsored by Commonwealth Savers.  CollegeAmerica is a nationwide plan sponsored by Commonwealth Savers. 
All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.
Use of this website is intended for U.S. residents only.
Capital Client Group, Inc.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.