Under 30? Here Are 3 Smart Money Moves You Can Make Today

Young professionals are in a great place to build wealth.

If you're under the age of 30, you are uniquely positioned to take advantage of a long time horizon before retirement. By strategically saving and investing, you can build your financial future. While saving is one factor of financial success, another important factor is tax liability.

1. Make Roth contributions

Roth retirement accounts, including Roth IRAs, are savings vehicles that offer significant tax advantages. By paying taxes on contributions today, tax-free withdrawals are allowed in the future. Many Americans are eligible to contribute to Roth IRAs, and while fewer have access to Roth 401(k)s, the vehicles work similarly.

Read More: Our Best Roth IRA Accounts for June 2022

So why would you want to prepay tax? The biggest reason is because of an assumed higher tax rate in the future. This could be for a number of reasons. If you, as a young professional, are in your lower earning years, it may make sense to contribute to a Roth account because high levels of savings may push you into high tax brackets in retirement. Another reason is an expected hike in future tax rates. Currently, Americans are taxed at historically low rates. Assuming Congress raises tax rates in the future, tax-free Roth distributions will be incredibly valuable. Whether individually or nationally, Roth contributions hedge against higher future tax rates by prepaying tax liability.

2. Use an HSA

One of the few triple tax-advantaged savings vehicles, a Health Savings Account, or HSA, is an account that young professionals should take advantage of. One strategy to use with an HSA is to save today and spend tomorrow, taking advantage of tax-free growth.

Basically, the strategy works like this: After opening an HSA, you or your family make a deductible contribution up to the annual maximum amount of $3,650 or $7,300 for families. Then, as medical expenses are incurred, you pay expenses out of pocket and retain receipts. Meanwhile, the HSA is allowed to grow tax-free. In retirement, the HSA, which has likely grown significantly, can be depleted tax-free with proof of qualifying medical expenses -- no matter how long ago they occurred.

This strategy might be right for you if you are in good health and able to afford to pay healthcare expenses out of pocket. Young professionals, who are typically in relatively good health, are likely to incur fewer medical expenses today, allowing greater growth potential. Being able to pay out of pocket is important because it allows the cash in an HSA to grow, but that should not be at the expense of security in cash flows. An HSA acts to protect you and your family from unexpected medical expenses, but using it strategically can also save you come tax time.

3. Ditch the cash

Keeping an emergency fund is a vital part of a healthy financial plan. Experts suggest holding onto about three to six months' worth of expenses in cash. However, cash is a non-growth asset which is susceptible to losing purchasing power, especially in our high inflation environment.

Instead of keeping large amounts of cash on hand, consider building your emergency fund and investing the rest. Couple this extra savings with a tax advantaged account to make the most of the cash you invest. Whether the balance is invested in a brokerage account, an IRA, or supplements higher 401(k) deferrals, high rates of saving can make a huge difference for the young worker. Like with many of the tips in this article, small adjustments made today can lead to big changes down the road, especially when made early on in your financial journey.