10 savings accounts that come with sweet tax breaks

It's tax season, and people across the country are sharpening their pencils, firing up their computers or heading off to their accountants to figure out how much they owe Uncle Sam.

Some of the best ways to reduce your taxes is saving money using one of these 10 options for savings accounts:

1. Traditional 401(k) retirement plan

A traditional 401(k) retirement plan lets you put pre-tax money aside for retirement. The money then grows as tax-free savings, and is only taxed once it's withdrawn. You have to wait until age 59 ½ to dip into the account though or face a penalty on top of the taxes.

In 2016, workers are allowed to contribute up $18,000 tax free to their 401(k) plan. Those age 55 or older could make an additional $6,000 "catch-up" contribution. 403(b), 457 and government thrift plans all work similarly to a 401(k).

You don't even have to be an employee to get these tax benefits.

"A lot of time, small self-employed people don't realize they have the ability to set up their own plan," says Scott Cousino, a certified financial planner and owner of Legacy Financial Planners in Grand Rapids, Michigan.

2. Roth 401(k)

Like a traditional 401(k), a Roth 401(k) is sponsored by employers to help their workers save for retirement. Unlike a traditional 401(k), the money deposited into these accounts is not tax deductible. However, withdraws made in retirement are tax-free.

3. Traditional IRA

For those who don't have access to a 401(k) or who have maxed out their contributions to one, a traditional individual retirement account (IRA) offers the exact same tax perks. Money is deposited tax free and then taxed upon withdrawal in retirement.

"If you save $5,500, right off the bat you'll be able to take that off your income and reduce your taxable amount," says Aries Jimenez, a financial life planner with San Diego Wealth Management.

The tax benefits may be the same, but there are some important differences between 401(k)s and IRAs. The first being that the contribution limit for IRAs is much lower - only $5,500 in 2016 or $6,500 for those age 50 or older. In addition, there are income limits on who can contribute.

4. Roth IRA

The Roth IRA works the same as a Roth 401(k) in that contributions are made with after-tax dollars but withdrawals in retirement are tax free. The same contribution limits apply to both traditional and Roth IRAs, but the income limits are significantly higher for Roth accounts.

5. Saver's Credit

The Saver's Credit may not be well known among all tax payers, it could benefit lower income or two-person households.

"The lower income families typically don't get the same tax benefits as higher earners [when saving for retirement]," explains Greg Hammer, investment advisor representative and owner of Hammer Financial Group in Schererville, Indiana.

While getting a deduction for a 401(k) contribution may add up to a lot of money for a family in the 33 percent tax bracket, it's not nearly as much for someone in the 10 percent bracket.

However, the Saver's Credit gives a tax credit of up to $4,000 for married couples filing jointly and who earn less than $61,500 in 2016.

10 Savings Accounts with Tax Breaks

6. In-State 529 plans

Tax incentives for saving money don't stop with retirement savings as there are options for college savers, with 529 plans being the most popular.

These 529 plans are funded with after-tax dollars, meaning there is no federal deduction upfront. However, money in the account grows tax-free and can be withdrawn tax-free for qualified education expenses.

Some states up the ante by offering their own tax incentives for 529 plans, but the catch is you usually need to invest in a plan authorized by that state.

7. Out-of-State 529 plans

While in-state 529 plans are best for those wanting to take advantage of state tax incentives, there's no reason people can't invest their college savings in 529 plans offered in other states. Those who don't pay state sales tax may want to look elsewhere to find a plan offering the best investment options.

8. Coverdell Education Savings Account

Sometimes called an Education IRA, the Coverdell Education Savings Account used to be the main way to save for college prior to the creation of 529 plans.

Like 529 plans, money deposited into the account isn't tax-free but it grows tax-free and can be withdrawn tax-free for education expenses. However, only $2,000 can be deposited into a Coverdell account each year.

9. Health Savings Account

These accounts offer triple tax savings: deposits are tax deductible, money grows tax-deferred and when used for qualified medical expenses, withdraws are tax free. Even better, if you hit age 65, you can withdraw money the same as you would with a traditional IRA.

In 2016, those with qualified individual health policies can contribute up to $3,350 to their health savings account while the limit for those with family plans is $6,750. People age 55 or older can put in an additional $1,000 as a "catch-up" contribution.

10. Flexible Spending Accounts

Like a health savings account, money deposited in these accounts is tax deductible, but dollars in a flexible spending account must typically be spent each calendar year or it reverts back to the employer. Still, for those who have regular medical expenses - such as ongoing prescription drug needs - a flexible spending account is a good way to pay for those costs tax-free.

In taking advantage of the many breaks available during tax season, consider opening these types of savings accounts to maximize not only tax-free savings, but also your financial security in the long run. 

Comment: Which savings accounts with tax breaks do you have? 

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