Saving for retirement is a big job. Accounts that offer tax advantages can help and can be a key part of an overall tax strategy because they allow you to put off paying taxes. For savers, the key is to maximize the potential tax benefits of these accounts, if you and your adviser decide that attempting to defer taxes makes sense for you.
Take advantage of retirement accounts.
Among the biggest tax benefits available to most investors are the benefits offered by retirement savings accounts such as 401(k)s, 403(b)s, and IRAs. Traditional 401(k)s, IRAs, and other accounts can offer a double dose of tax advantages—the contributions you make may reduce your current taxable income, saving you cash this year, and any investment growth is tax deferred, saving you money while you are invested. In the case of HSAs, accounts that are used with high-deductible health care insurance plans, withdrawals used for qualified medical expenses could be triple tax free: tax-free contributions, earnings, and withdrawals.
“The tax advantages of these accounts are one reason we think a top financial priority for most investors should be to take advantage of 401(k)s, HSAs and other workplace saving plans, or IRAs,” says Hevert.
Generally, the first step to tax-advantaged savings should be through workplace savings plans, IRAs, or both. But those accounts have strict annual contribution limit rules. If you are looking for additional tax-deferred savings, you may want to consider deferred variable annuities, which have no IRS contribution limits.
Tax-advantaged accounts can help your money grow.
Saving in a tax-deferred account has the potential to let your balance grow faster, and taking advantage of an employer match, if one is available, makes workplace retirement savings an important part of a tax strategy. This hypothetical scenario compares the value of saving $10,000 a year for 25 years in a taxable account, a traditional tax-deferred 401(k), and a traditional tax-deferred 401(k) with an annual match of $3,000. Not everyone has access to a match, and it’s not a tax advantage, but if you do save more using a match, it may help speed progress towards your financial goals. (This scenario assumes a 7% annual return.)