What tax-advantaged accounts are available to you

Tax-advantaged accounts let you set aside money for specific purposes and pay less in taxes on that money or the growth it earns. As a lower-income person, you have access to the same accounts as higher earners, but the tax benefit works differently for you — and some accounts are designed specifically with lower incomes in mind.

The main accounts are: Health Savings Accounts (HSAs), which cover medical costs; Flexible Spending Accounts (FSAs), which also cover medical and dependent care costs but work through your employer; Individual Retirement Accounts (IRAs), which save for retirement; and Dependent Care FSAs, which pay for childcare. There are also state-run 529 plans for education savings, though these matter less if you have no money to save right now.

The catch: most of these require you to have earned income from a job, and some require your employer to offer them. If you are self-employed, unemployed, or work for a very small employer, your options narrow. This guide walks through what is actually available to you and what each account costs to use.

Key Takeaways

  • Health Savings Accounts (HSAs) are the most powerful account for lower-income people because you can withdraw money tax-free for medical costs at any time, with no income limit.
  • You must be enrolled in a high-deductible health plan (HDHP) to open an HSA, and not all employers offer these plans.
  • Flexible Spending Accounts (FSAs) let you set aside pre-tax money for medical or childcare costs, but you lose any money you do not spend by the end of the year.
  • Traditional IRAs offer a tax deduction when you contribute, which lowers your taxable income in the year you save — a real benefit for lower earners.
  • If you have no employer plan and little income, a Roth IRA or a self-employed SEP-IRA may be your only retirement savings option.

Health Savings Accounts (HSAs) and who can open one

An HSA is a savings account tied to a high-deductible health plan. Money you put in is not taxed, money that grows in the account is not taxed, and money you take out to pay for medical costs is not taxed. This triple tax break makes HSAs the most powerful account for lower-income savers.

To open an HSA, you must be enrolled in a high-deductible health plan (HDHP) through your job, the marketplace, or a private insurer. Your employer does not have to offer one — you can buy one yourself on the health insurance marketplace. For 2024, an HDHP has a minimum deductible of $1,600 for individual coverage or $3,200 for family coverage. You cannot be on Medicare, covered by another person's health plan, or claimed as a dependent on someone else's tax return.

The account belongs to you, not your employer. If you leave your job, the money stays in your HSA. You can invest the balance in stocks or bonds, and it grows tax-free. After age 65, you can withdraw money for any reason without penalty, though non-medical withdrawals are taxed as income.

The main limit: you can only contribute if you are enrolled in an HDHP. If your employer does not offer one and you cannot afford to buy one on the marketplace, you cannot use an HSA. Some employers offer HSAs but not HDHPs, which means you cannot contribute even if the account exists.

Flexible Spending Accounts (FSAs) through your employer

An FSA is an employer plan that lets you set aside pre-tax money for medical costs or childcare costs. You decide how much to contribute each year, and your employer deducts that amount from your paycheck before taxes are calculated. This lowers your taxable income and your tax bill.

For medical FSAs, you can set aside up to $3,300 per year (2024 limit). For dependent care FSAs, the limit is $5,000 per year if you are married filing jointly or single, or $2,500 if you are married filing separately. You use the money to pay for may be able to access costs — copays, deductibles, prescriptions, glasses, and childcare — and you submit receipts to get reimbursed.

The critical drawback: any money you do not spend by the end of the year is forfeited. You cannot carry it over to the next year. Some employers offer a grace period of up to 2.5 months into the next year, or a carryover of up to $610, but most do not. This means you have to guess how much you will spend and risk losing money if you guess wrong.

FSAs are only available through employers. If you are self-employed or work for a company that does not offer one, you cannot use an FSA. You also cannot contribute to both an FSA and an HSA in the same year, though you can use an HSA and a dependent care FSA together.

Individual Retirement Accounts (IRAs) for lower earners

An IRA is a personal retirement account you open on your own, not through an employer. There are two main types: Traditional IRAs and Roth IRAs. The difference matters for lower-income people because of how taxes work.

With a Traditional IRA, you contribute money and deduct it from your taxable income in the year you contribute. If you earn $25,000 and contribute $3,000 to a Traditional IRA, your taxable income drops to $22,000. You pay less tax that year. The money grows tax-free, and you pay income tax on withdrawals in retirement. For 2024, you can contribute up to $7,000 per year (or $8,000 if you are 50 or older).

With a Roth IRA, you contribute money that has already been taxed. You do not get a tax deduction now. But the money grows tax-free, and you pay no tax on withdrawals in retirement — including the growth. For lower-income people, a Roth IRA is often better because your tax rate is low now and will likely be higher in retirement.

Both accounts have income limits for contributions. For a Traditional IRA, the deduction phases out if you or your spouse have a workplace retirement plan and earn above a certain amount. For a Roth IRA, you cannot contribute at all if your income is above the limit. For 2024, the Roth limit starts phasing out at $146,000 for single filers and $230,000 for married couples filing jointly. If your income is below these thresholds, you can contribute to a Roth.

You can open an IRA at any bank, brokerage, or credit union. There is no employer involved. You can open one even if you have no other retirement plan.

Self-employed retirement accounts if you have no employer

If you are self-employed or have side income, you can open a SEP-IRA or a Solo 401(k). These are retirement accounts designed for people with no employees.

A SEP-IRA is the simplest. You can contribute up to 25% of your net self-employment income, up to $69,000 per year (2024 limit). The contribution is deducted from your taxable income. You open it at a bank or brokerage, and there is almost no paperwork. The money grows tax-free, and you pay tax on withdrawals in retirement.

A Solo 401(k) is more complex but allows higher contributions. You can contribute up to $69,000 per year (2024 limit) if you have enough self-employment income. It requires more paperwork and record-keeping, but it gives you more flexibility and higher limits than a SEP-IRA.

Both accounts require you to have self-employment income — money you earned from work, not from investments or benefits. If you have no income, you cannot contribute to either account.

How much you can actually save as a lower-income person

The tax benefit of these accounts depends on your tax bracket. If you earn $25,000 per year as a single person, you are in the 12% federal tax bracket (2024). Every dollar you contribute to a Traditional IRA or FSA saves you 12 cents in federal tax, plus whatever your state income tax is.

This is real money, but it is not huge. If you contribute $3,000 to a Traditional IRA, you save about $360 in federal tax. That is useful, but it is not life-changing. The real benefit of these accounts for lower-income people is that they let you save money that would otherwise be spent, and the tax savings are a bonus.

For an HSA, the math is different. You save taxes on the contribution, the growth, and the withdrawal — three times. If you put $2,000 into an HSA and it grows to $3,000, you pay no tax on that $1,000 of growth. That compounds over decades. Even small contributions add up.

The catch: you have to have money left over after paying rent, food, and utilities to contribute anything at all. If you are living paycheck to paycheck, these accounts do not help you right now. They are tools for people who have a small surplus and want to reduce their tax bill.

Common mistakes and how to avoid them

The biggest mistake is contributing to an FSA and then not spending the money. If you set aside $2,000 for medical costs and only spend $1,200, you lose $800. To avoid this, track your medical and childcare costs from the past two years and contribute only what you are confident you will spend. If you are unsure, contribute less.

The second mistake is opening a Roth IRA when a Traditional IRA would save you more money. If you are in the 12% tax bracket now and expect to be in the 22% bracket in retirement, a Traditional IRA saves you 12% now and costs you 22% later — a bad trade. But if you are in the 12% bracket now and expect to be in the 12% bracket in retirement, a Roth is better because you lock in the low rate. Think about your likely income in retirement before you choose.

The third mistake is assuming you can contribute to an HSA without an HDHP. You cannot. If your employer does not offer an HDHP, you have to buy one on the marketplace yourself, and that costs money. For some people, the tax savings are worth it. For others, they are not. Do the math before you switch plans.

Frequently Asked Questions

Can I withdraw money from my HSA before retirement?

Yes. You can withdraw money from an HSA at any time for any medical cost — copays, deductibles, prescriptions, dental work, glasses, hearing aids, and many other things. You do not have to wait until retirement. The IRS publishes a full list of may be able to access medical costs. If you withdraw money for a non-medical cost before age 65, you pay income tax on the withdrawal plus a 20% penalty.

What happens to my FSA money if I leave my job?

You lose it. Any money in your FSA that you have not spent by the end of the year is forfeited to your employer. This is true even if you leave the job mid-year. Some employers allow you to continue using the FSA for a limited time after you leave, but the money is still forfeited if you do not spend it. This is why you should contribute conservatively to an FSA.

Can I have both an HSA and a Traditional IRA?

Yes. You can contribute to both in the same year. The HSA is for medical costs, and the Traditional IRA is for retirement. They serve different purposes and have different rules. You can also have an HSA and a Roth IRA together.

Do I have to report my HSA contributions on my tax return?

If your employer contributes to your HSA, your employer reports it on your W-2 form, and you do not have to do anything. If you contribute yourself, you report it on Form 8889 when you file your tax return. The contribution is deducted from your taxable income, just like a Traditional IRA contribution.

What if I have no income — can I still open an IRA?

No. You must have earned income from work to contribute to an IRA. If you have no job and no self-employment income, you cannot contribute. If you are married and your spouse has income, you may be able to contribute to a spousal IRA, but you still need your spouse's earned income to do so.