Whether it's planning for your children's college tuition or executing part of your overarching financial plan, savings contributions are a crucial tool on your road to financial independence and freedom.
Sadly, today's economic climate, coupled with a pervasive lack of financial literacy, means that many Americans have not sufficiently saved for their future. According to the Federal Reserve, 35% of American adults do not have enough cash saved to cover a $400 emergency, with 12% of adults totally unable to cover the expense, even when using means such as credits.
Thankfully, there are a plethora of options for those who want to take financial control of their future, with tax-deferred accounts enabling individuals to save for retirement, and any unexpected expenses, effectively.
IT IS NEVER TOO LATE to start striving for financial freedom and the retirement of your dreams. If you make your financial well-being a priority, remarkable achievements are possible.
Join me as I detail how you can make a tax-deferred retirement account work for you and how to maximize your contributions to these tax-advantaged accounts.
How Do Tax-Deferred Accounts Work?
Tax-deferred means that the account holder of tax-deferred accounts can contribute using pretax money, with the taxation being shelved until a withdrawal is made. The tax deferral allows individuals to leverage the effects of compound interest since the contribution is not diminished by ordinary income tax.
Tax-deferred savings accounts are classed as immediate tax benefits since taxation is postponed until a withdrawal is processed. This is distinct from tax-exempt accounts, whereby contributions are made with the capital that remains after income taxes, but accessing the accumulated wealth through normal or early withdrawals is tax-free. Both tax-exempt and tax-deferred accounts are tax-advantaged accounts, but the differences between them are significant.
There are numerous tax-deferred retirement accounts to choose from, from an employer-sponsored retirement plan, such as a 401(k), to individual retirement accounts (IRAs). These various accounts and their differences are discussed below.
Which Retirement Accounts Are Tax-Deferred?
The 401(k) is a workplace retirement plan whereby employers match the annual contributions made by their employees to their retirement account. For those who are self-employed and subsequently can't leverage employer-sponsored plans, a traditional individual retirement account (IRA) allows individuals to save using pre-tax dollars. With traditional IRAs, taxes are only paid after retirement. Here, individuals pay tax on the amount in their traditional IRA account according to the tax bracket within which they fall at the time.
Other tax-deferred options include tax-deferred annuities, where an individualpays an insurer at certain intervals, with the insurer then paying them at a later date. The payment can be in installments or as a lump sum. These annuities can be classed as fixed, indexed, or variable annuities. Fixed annuities pay a guaranteed rate, while variable annuities pay amounts that change according to the performance of mutual funds.
Another tax-deferred option available to U.S. taxpayers is bonds issued by the federal government. These bonds, which include Series EE bonds, are bought with a guarantee of pre-determined investment returns.
While both tax-deferred annuities and bonds are excellent sources of additional income for retirement, most individuals' primary tax-deferred accounts will be their 401(k) and traditional IRA.
Which Retirement Accounts Are Not Tax-Deferred?
Retirement accounts where contributions are made using after-tax dollars are tax-exempt as opposed to tax-deferred. Here, individuals pay the tax upfront and if all conditions are met may be able to access their money tax-free upon retirement. Roth IRAs and Roth 401(k)s are both examples of tax-exempt accounts.
How to Maximize Savings Contributions
Maximizing your savings contributions is an essential step in ensuring a financially secure future. One way to do this is to contribute as much as you can afford to your retirement savings accounts, such as a 401(k) or IRA. It's also a good idea to set specific savings goals and track your progress toward reaching them. Additionally, consider increasing your contributions over time, either by increasing the percentage of your salary that you save or by making additional contributions when you receive a raise or bonus. It is important to note that there are contribution limits for these types of accounts, so clever planning is required for those looking to accelerate their retirement beyond these limits. You can also reduce your expenses and increase your income in order to free up more money for savings. Below are some of my top tips for maximizing your savings contributions.
Take Advantage of the Array of Tax-Advantaged Accounts
If possible, make use of both traditional IRAs and traditional 401(k)s. If a certified financial planner believes that the Roth equivalents of these are better suited to your situation, then follow their advice. Making use of multiple tax-advantaged accounts, whether they are tax-deferred or tax-exempt, will reduce your tax bill.
Learn About Health Savings Accounts (HSAs)
The health and well-being of you and your loved ones SHOULD ALWAYS BE A PRIORITY! The good news is that if you're clever about how you set aside your money for these types of expenses, you can still keep up your savings.
Health Savings Accounts (HSAs) are a type of tax-advantaged account that is available to those on aHigh Deductible Health Plan (HDHP). Through HSAs, individuals can set aside money for qualified medical expenses with their pre-tax income. These types of tax advantages can reduce the costs associated with unforeseen expenses, thereby freeing up more funds for contributions toward tax-deferred retirement accounts.
Make Use of Effective Financial Goal Setting
Financial goals are crucial for a successful retirement plan because they provide a clear target to work towards and help you prioritize your financial decisions. Without financial goals, it can be easy to get sidetracked and not make the most of your retirement savings. Having specific financial goals in mind can help you make informed decisions about how much to save and how to invest your money. For example, if your goal is to have a certain amount of money available for travel in retirement, you may choose to save and invest differently than if your goal is to have a steady stream of income to cover your basic expenses. Financial planning isn’t sexy. It’s not something that keeps you motivated. It can be easy to get discouraged when you do not see immediate results. But having a specific goal to work towards can help you to create the life you desire. In addition to personal financial goals, it's important to consider the potential impact of external factors, such as inflation and potential changes to Social Security and other retirement benefits. By factoring these factors into your retirement plan, you can ensure that your savings will be sufficient to meet your needs in the long term. Overall, setting and working towards financial goals is a crucial part of planning for retirement. By setting clear saving goals and regularly reviewing and adjusting your plan, you can make the most of your retirement savings and work towards a secure financial future.
Remember, you are saving for YOUR DREAM SCENARIO! You can choose what you want that to look like and make it happen. The ball is totally in your court.
Maximizing Your Tax-Deferred Contributions: Achieving Your Financial Goals and Peace of Mind
Being strategic about your contributions means more than just having a good handle on your finances - it means having the freedom to live the life you envision for yourself and your family. When you're in control of your money and its growth, you have the power to make choices about your future and pursue your goals. Working with me will ensure that we keep the main thing the main thing. Tax tools are just a means to an end. We will carefully consider all your options and make the most of tax-deferred accounts, and every other financial tool, in order to secure your financial future. Join my upcoming live event for the best-kept secrets and how we can help unlock them for you and your family.
This material is intended for general public use. By providing this content, Park Avenue Securities LLC and your financial representative are not undertaking to provide investment advice or make a recommendation for a specific individual or situation, or to otherwise act in a fiduciary capacity. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. Guardian and its subsidiaries do not issue or advise with regard to health savings accounts.